"Show me the AI money" this tech earnings season
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Four members of the Magnificent 7 tech stocks report their quarterly results this week, with earnings for the group expected to grow by nearly 17%.
Why it matters: This is the "most eventful week" of the earnings season as investors weigh whether the AI darlings can keep fueling this bull market, writes José Torres, senior economist at Interactive Brokers.
What they're saying: Earnings results from the Big Tech players come as investors have been moving out of AI names and into stocks that would benefit from additional interest rate cuts, Torres says in a note to clients.
- If tech companies can't deliver on new AI initiatives or expected profits, investors are ready to "keep rotating into the re-acceleration trades that benefit disproportionately from rate cuts amidst faster growth," he says.
State of play: The results this week could make or break market leadership.
- Options markets are pricing in a bigger market reaction to tech earnings from Meta and Microsoft than to the next decision on interest rates from the Federal Reserve, which comes tomorrow.
- Nvidia earnings, scheduled for late February, are being priced as the most important market event over the next month, per data from Stuart Kaiser, the head of U.S. equity trading strategy at Citi.
Zoom in: Investors will focus on the "AI monetization timeline vs. AI capex guidance," writes Savita Subramanian, equity and quant strategist at Bank of America.
- Translation: How long until you make money, and how much are you wiling to spend in the meantime?
- Those questions say a lot about why Google parent Alphabet has outperformed other tech giants.
- Alphabet is the market favorite because of its monetization efforts surrounding its own chips business combined with what is seen as responsible capital expenditure.
Zoom in: Here's what to watch from each company reporting this week.
- Microsoft: Watch Azure growth, revenue performance obligations, any update on data-center spending and any signal about OpenAI's balance sheet, which also has contracts with several other Big Tech companies.
- Meta: Check its spending spree. Meta was dinged last quarter for plans to increase its capex. "The company also needs to develop AI-based revenue streams," JPMorgan analysts note.
- Apple: Watch for demand resilience from customers and any AI surprises. Morgan Stanley analysts expect shares to trade sideways to slightly lower due to seasonal headwinds.
- Tesla: Focus on any full self-driving updates and customer demand amid increased competition. The stock doesn't typically trade on fundamentals, though consensus is that earnings will be lower than this time a year ago.
The bottom line: Investor reactions to earnings beats or misses could be very telling about sentiment. It has been the most punishing earnings season thus far since 2000, according to Bank of America.
- If you miss on earnings, your stock gets hammered.
