A Look Ahead | As the S&P 500 and Nasdaq reach new highs, tech giants' earnings reports are coming in. Can the AI narrative continue to lead the market? Check out the earnings forecasts!

As the calendar moves into mid-April, the US stock market’s first-quarter earnings season slowly kicks off.

Currently, the US stock market is entangled with the situation in the Middle East, significant fluctuations in oil prices, and the wave of artificial intelligence. One month ago, the US stock market was shrouded by the gloom of war in the Middle East, but now it has strongly recovered all losses, staging a V-shaped reversal. $Nasdaq Composite Index (.IXIC.US)$ achieving an 11-day winning streak, $S&P 500 Index (.SPX.US)$ breaking through the 7,000-point mark for the first time, rising to historical closing highs.

Against this backdrop, global investors have once again turned their focus to the performance of tech giants in the US stock market. In late April, six out of the 'Magnificent Seven' in the US stock market will release their latest quarterly results, among which $Tesla (TSLA.US)$ one company will report next week,$Apple (AAPL.US)$、$Microsoft (MSFT.US)$、 $Alphabet-A (GOOGL.US)$ /$Alphabet-C (GOOG.US)$、$Amazon (AMZN.US)$、 $Meta Platforms (META.US)$ and another will release at the end of the month. $NVIDIA (NVDA.US)$ Also achieving an 11-day winning streak, the company will announce its earnings on May 20 Eastern Time.

Wall Street firms are generally optimistic about this earnings season. Deutsche Bank expects that the year-on-year growth rate of S&P 500 Index earnings per share (EPS) for Q1 will hit a four-year high, surpassing market consensus expectations. According to Goldman Sachs data, $NVIDIA (NVDA.US)$and$Micron Technology (MU.US)$two companies alone are expected to contribute more than 50% of the overall EPS growth rate of the S&P 500. The AI theme remains the core narrative of this earnings season.

FactSet noted that based on the average improvement in earnings growth rates during the earnings season,S&P 500 IndexQ1Profit growth may reach 19%.Deutsche Bank also forecasts that the Q1 EPS growth rate of the S&P 500 will reach 19%, hitting a four-year high and marking the sixth consecutive quarter of double-digit growth. Deutsche Bank noted that it is historically rare for consensus to expect such strong growth before the earnings season begins.

The drivers of robust earnings expectations can be attributed to three aspects:Acceleration in macroeconomic growth, benefits from the weakening dollar, and the ongoing deepening of the AI boom cycle.

On the macro level, the annual GDP growth rate for the US in Q1 is projected at 2.9%, at the upper end of a robust range over the past six quarters. The ISM manufacturing index returned to expansion after three and a half years of contraction, while the services index rose to a three-year high.

In terms of exchange rates, the US dollar depreciated by an average of 6.8% year-on-year in Q1, representing the largest annual decline in about five years, contributing approximately 4.1 percentage points to the EPS growth rate of the S&P 500. The energy, materials, large-cap growth technology, and industrial sectors benefited significantly.

– AI remains the main narrative of the earnings season

According to Goldman Sachs data, the largest weighted stocks related to AI are expected to drive more than 60% of the S&P 500's Q1 EPS growth, withNVIDIA (contributing 3.3 percentage points) and Micron Technology (contributing 2.7 percentage points) collectively accounting for over 50% of the overall EPS growth.

From a sector perspective, Deutsche BankThe earnings per share (EPS) growth rate of the Mega Cap Growth Technology (MCG & Tech) sector is expected to accelerate from 27.5% in the previous quarter to 35.7%, led by semiconductor manufacturers.Even after excluding NVIDIA and Micron Technology, the sector's growth rate is still projected to be as high as 22%. Goldman Sachs pointed out that the Information Technology sector is expected to see EPS growth of 44%, contributing 87% of the S&P 500’s overall EPS growth for Q1 alone.

Analysts expect hyperscale cloud computing companies to reach a total capital expenditure of $149 billion in the first quarter, representing a year-over-year increase of 92%, although this growth rate is expected to moderate in subsequent quarters. Goldman Sachs estimates that AI infrastructure investment will contribute approximately 40% of the S&P 500’s full-year EPS growth in 2023.

– Geopolitical risks and macroeconomic uncertainties

Despite strong fundamentals in earnings, the market currently faces geopolitical risks and macroeconomic uncertainties. The conflict with Iran has driven oil prices sharply higher, while U.S. inflation data for March recorded its largest increase in nearly four years, accompanied by a continued weakening in consumer confidence. Institutions generally believe thatthe importance of forward-looking guidance and management commentary this earnings season will outweigh the significance of already-reported performance figures.

Goldman Sachs noted that the current positioning of the 'Magnificent Seven' stocks in the U.S. market is the cleanest it has been all year, with net positioning at the 50th percentile over the past three years and total positioning only at the 22nd percentile. Traders at Goldman Sachs believe that if geopolitical tensions ease during the earnings season, strong profit figures could become a catalyst for capital to re-enter the market, with momentum longs, AI beneficiaries, storage, and semiconductor sectors likely to benefit first.

Goldman Sachs cautioned thatmacro factors will dominate the market more than micro fundamentals this earnings season. It is anticipated that stock price reactions to earnings will be weaker than historical averages, with both rewards for outperformance and penalties for underperformance being lower than usual levels.—a scenario reminiscent of market behavior during the tariff shock period in Q1 2025.

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