Lessons from the Magnificent Seven earnings

Six of the Magnificent Seven companies have released their June-quarter earnings reports. Apple, Microsoft, Alphabet and Amazon beat market expectations, while Meta Platforms and Tesla missed analysts’ forecasts.

The one outstanding report is from AI chip giant Nvidia, which is due to release its earnings after the US market closes on 26 August. Expectations ahead of the announcement remain extremely high. Key will be management’s outlook and any reassurance that spending by major customers such as Microsoft, Amazon, Alphabet and Meta remains robust, and that demand for Nvidia’s Blackwell AI chips continues to outstrip supply.

But what has this earnings season taught us so far?

Spending scrutinised

For the past couple of years, markets largely rewarded companies for announcing ever-larger AI spending plans. This earnings season, however, investors wanted evidence that AI-related capital expenditure is generating tangible revenue growth and customer demand. Microsoft and Amazon were rewarded because they linked higher spending to exceptionally strong growth in their cloud businesses, Azure and AWS, while Alphabet and Meta faced a more sceptical reception as investors questioned the returns on their infrastructure investments.

Google parent Alphabet reported revenue of $119.8bn, ahead of the $117.1bn expected by analysts, while Google Cloud revenue surged 82% year-on-year, highlighting strong demand for its AI and cloud services. However, management’s guidance for roughly $75bn of capital expenditure in 2026 was higher than investors had expected. As a result, the market focused less on the strong revenue performance and more on whether these enormous AI-related investments will generate sufficient returns in future years.

Meta’s shares fell following its earnings report due to a combination of weaker-than-expected earnings and continued heavy spending on AI infrastructure. Although the company reported revenue growth of 28% year-on-year to $60.8bn, net income fell 14% and earnings per share came in below market forecasts. Investors were also unsettled by management raising the lower end of its 2026 capital expenditure guidance to $130bn from $125bn.

Cloud computing still the strongest driver

Cloud computing providers are now being compared with the merchants who sold picks and shovels during the 19th-century gold rushes. While thousands of prospectors searched for gold, many failed to strike it rich. The suppliers of the essential tools, however, profited regardless of which miners succeeded. A similar dynamic is emerging in AI.

Cloud businesses have benefitted enormously from the AI boom because developing and deploying AI models requires vast amounts of computing power, data storage and networking infrastructure. Rather than building their own data centres, many companies rent these resources from cloud providers, creating a surge in demand for services offered by Microsoft Azure, Amazon Web Services (AWS) and Google Cloud.

This trend was evident in the latest earnings season, with Microsoft reporting Azure revenue growth of 43% and Amazon’s AWS division delivering growth of 37%, demonstrating that businesses continue to increase spending on AI-related computing capacity. These results reassured investors that AI adoption is translating into real revenues in parts of the technology sector.

Diverging market reactions

Market reactions to the earnings reports varied sharply despite broadly solid revenue growth across the sector. Microsoft and Amazon enjoyed strong share-price gains following their results, while Meta, Alphabet and Tesla faced greater scrutiny.

This suggests investors are becoming more selective and increasingly evaluating each company on its own fundamentals rather than treating the Magnificent Seven as a single trade.

Tesla remains something of an outlier within the Magnificent Seven because its investment case is not centred on AI infrastructure, the area driving growth elsewhere in the group. While the other technology giants are benefitting from surging demand for cloud computing, data centres and AI services, Tesla continues to derive most of its revenue from selling electric vehicles, a market that has become increasingly competitive.

Investors have grown concerned about slowing vehicle sales growth, pressure on margins, weaker profitability and the company’s ability to justify its premium valuation relative to traditional carmakers. Although management continues to emphasise opportunities in autonomous driving, robotics and AI, many investors remain unconvinced about the timing and commercial potential of these initiatives. The company has yet to demonstrate the same clear link between AI investment and revenue growth that companies such as Microsoft and Amazon have already shown.

The case for AI is intact

The long-term growth story for AI remains intact after this earnings season, but the market appears to be becoming more disciplined. Growth remains strong across much of Big Tech, particularly in cloud computing, but investors are increasingly asking when today’s massive AI investments will begin to generate commensurate returns. Companies that can provide a convincing answer are likely to be rewarded.