AI Doubters Got a 'Wake Up Call' From Earnings as Tech Results Came In Strong

Key Takeaways

• Most S&P 500 companies have reported first-quarter results by the end of last week, with 84% of them beating Wall Street analyst estimates. Tech is doing even better.

• The S&P’s biggest companies are outpacing the overall index since the end of March, up more than 25% compared to the benchmark’s 16% gain.

This earnings season has dealt a blow to AI doubters—and showered rewards on those who kept the faith.

Nearly all of the S&P 500’s members have reported earnings for the latest quarter, and 84% of those that have, beat analysts’ earnings expectations—higher than the one-, five- and 10-year averages, according to DataTrek’s Nicholas Colas and Jessica Rabe. Underneath the hood, tech did a lot of the lifting, with the sector logging beats at a 94% clip, they said. That goes a lot of the way toward explaining why stocks are rising these days; the benchmark S&P 500 is up 16% since the end of March, while the so-called Magnificent Seven, the biggest stocks in the S&P, have climbed more than 25%.

“Overall this earnings season has been a ‘wake up call’ for the tech skeptics on the sideline of the AI Revolution,” Wedbush’s Dan Ives wrote Monday. He sees the numbers as a sign of more gains on the way, writing that that “AI adoption is underway”—demand for chips, other hardware, as well as software remains aloft, in other words—signaling a “bright green light to own the the core tech winners into the year-end.”

WHY THIS MATTERS TO YOU

Though various market experts have expressed concern over the S&P 500’s climb lately, AI skeptics sitting out tech stocks over the past few weeks have missed out on substantial gains.

That is the question of the moment for investors: Will tech stocks and the overall market keep going even after their torrid climb?

Morgan Stanley appears to think the market’s run is supported by the strong showing in earnings results. “Fundamental strength continues in US earnings,” Morgan Stanley’s equity strategy team led by Michael Wilson wrote in a report Monday. Mag 7 earnings are now expected to grow 34% this year, while the rest of the 493 S&P constituents projected to see EPS growth of 13%, they said—perhaps an indication that the benchmark index could keep running.

Indeed, even the market experts that say these are “crazy times” and that the market is “melting up” are buying AI stocks or hiking price targets that top Street estimates. Being a contrarian has been a losing proposition so far this year.

“Geopolitical concerns are valid and so is rising inflation, but the market doesn’t care and is focused on earnings growth. Fighting that narrative has been frustrating and not profitable,” Jay Woods, Freedom Capital Markets’ chief market strategist, said in an emailed statement. He is watching for a resolution around the Strait of Hormuz, which he said could be a “sell the news” event, as well as Tuesday’s inflation report, which he thinks could fuel a volatile trading day given the market’s outsize reaction to Friday’s jobs data. “Perhaps this week,” he wrote, “that story changes.”

And the earnings season, especially for Big Tech, isn’t over yet: Chip giant Nvidia (NVDA), the world’s most valuable company, is due to turn in its results next week.

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