Will AI investments pay off? Earnings season holds the answer

Nasdaq Composite surged to a new all-time high on Tuesday, fueled by the strength of its largest constituents — the  so-called Magnificent Seven stocks. 

The tech-heavy index climbed 0.8% to 18,712.75, outperforming the S&P 500 and the Dow Jones Industrial Average, which saw more moderate gains.

The Nasdaq’s impressive year-to-date growth now stands at 27%, outpacing the S&P 500’s 23% gain and the Dow’s 12% increase since January.

Markets are bracing for quarterly earnings from Big Tech giants. On Tuesday, Alphabet, Google’s parent company, reported earnings after the bell, exceeding expectations on both revenue and profit. For Q3, Alphabet’s revenue rose 15% year-over-year to $88.3 billion, beating estimates of $86.3 billion. The cloud computing segment, buoyed by increased demand for AI-powered services, reported $11.4 billion in revenue — up 35% from last year — with operating profit surging to $1.9 billion from $266 million in the prior year.

Earnings per share came in at $2.12, above expectations of $1.85 and last year’s $1.55. Net income rose to $26.3 billion, a 34% year-over-year increase. Ad revenue, a core component of Alphabet’s business, reached $65.9 billion, marking a 10.4% annual increase, while YouTube advertising revenue landed at $8.92 billion, slightly above analysts’ expectations of $8.89 billion.

Alphabet’s strong performance sets the stage for a busy week in tech earnings. Facebook parent Meta and Microsoft, a major investor in OpenAI, are up next, with earnings due on Wednesday after the market close.

Microsoft stock has gained 15% year-to-date and is poised for investor scrutiny, especially regarding its Azure cloud platform, where AI applications are heavily concentrated. Key focus areas include growth in Azure and overall business expansion. Last quarter, Microsoft announced plans to increase AI spending — having already invested $19 billion — aiming to expand its AI offerings in response to rising demand. Its flagship AI tool, Copilot, has been positioned as a transformative product, and earnings results will indicate how well it has resonated with business and consumer users.

Finally, Amazon and Apple will report their earnings on Thursday. For these tech giants, investors are particularly interested in their AI-related expenses and how much revenue AI investments are driving in return.

This article was written in cooperation with TradingView