Stock Market Insights: Earnings season - Wall Street wants more than AI hype

Joe Shearrer, CPFA® is Vice President and Wealth Advisor at Fervent Wealth Management.

Summer temperatures are heating up, and so is second-quarter earnings season. This week, all eyes are on Alphabet and Tesla as they report quarterly results. While both companies are always market movers, this time investors may be paying less attention to the earnings numbers themselves and more attention to what management says about artificial intelligence.

The AI race has become incredibly expensive. Alphabet, along with other mega-cap technology companies, has been pouring billions of dollars into data centers, advanced chips and the infrastructure needed to power AI. In fact, the largest technology companies are now on pace to spend nearly $800 billion a year on AI-related capital expenditures.

That's a staggering amount of money and investors have noticed. After leading the market higher for much of the year, the technology sector has taken a breather in July. Much of the weakness has come from semiconductor stocks as investors question just how long AI-related spending can continue at its current pace. While the long-term outlook for artificial intelligence remains compelling, Wall Street is becoming more focused on when these enormous investments will begin translating into higher profits.

For the last couple of years, investors have been willing to give these companies the benefit of the doubt. AI has enormous potential, and most believe these investments are necessary to stay competitive. However, the conversation is beginning to shift. Investors now want to know when all of this spending will begin producing meaningful returns.

That question has become even more important as competition heats up around the world and some of these companies take on more debt to fund their expansion. The long-term opportunity is still there, but the path forward isn't quite as straightforward as it looked a year ago. Fortunately, the broader earnings picture remains encouraging. Analysts currently expect S&P 500 earnings to grow roughly 30% during the second quarter, with technology companies expected to deliver nearly 70% earnings growth. Better yet, those estimates have continued moving higher as companies report, which is usually a healthy sign.

One development I'm watching closely is that earnings growth is starting to spread beyond just the technology sector. While the "Magnificent Seven" have driven much of the market over the past two years, companies in industrials, financials and other sectors are beginning to post stronger results as well. That's typically a healthier backdrop than relying on just a handful of companies to carry the market. Of course, earnings aren't the only thing investors have to think about.

Geopolitical tensions remain elevated, particularly in the Middle East, and that's helped push both oil prices and Treasury yields higher. Recently, those factors have been enough to keep the broader market moving sideways despite generally strong corporate earnings.

Looking ahead, I still believe the second half of the year has the potential to be constructive for investors, but it probably won't be a straight line. Strong earnings are certainly helping, but inflation, interest rates and global events will continue to influence market direction.

That's why I continue to encourage clients not to get caught up in every headline. Markets will always find something to worry about. Six months ago it was inflation. Today it's AI spending and geopolitical risk. Six months from now it will likely be something entirely different.

The companies that continue growing profits and adapting to changing conditions create value for shareholders and tend to be rewarded over time. As investors, our job isn't to predict every short-term twist and turn. It's to own quality investments, stay diversified and remain focused on the long-term plan rather than the daily news cycle.

Have a blessed week!

Joe Shearrer

www.FerventWM.com

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Fervent Wealth Management is a financial management and services entity in Springfield, Missouri.