Alphabet, Tesla earnings test AI rally with 31% profit growth expected

Big Tech earnings this week will test whether the AI-driven rally can sustain its momentum as a hedge fund manager warns the sector is in the "danger zone."

Alphabet and Tesla report earnings Wednesday, testing the AI rally as the Magnificent 7 face expectations for 31.1% profit growth.

"We will be looking for insights into whether customers are looking to manage their AI expenses by using lower-cost models," HSBC analysts wrote in a research note ahead of the reports.

Alphabet is expected to post Q2 revenue of $117.17 billion, up more than 20% from a year earlier, with earnings per share of $2.90, according to Visible Alpha estimates. Google Cloud revenue is projected to have surged 65% to $22.50 billion, a key gauge of AI compute demand. The options market is pricing a roughly 5% swing in Alphabet shares after the report, which would move the stock above $372 or below $335.

The results arrive at a critical juncture for the AI trade. Alphabet last month announced plans to raise more than $80 billion to fund its AI infrastructure buildout, and investors will be watching for evidence those investments are generating returns. A miss could trigger broad selling across the tech sector, while a beat may reinforce the AI narrative that has driven the S&P 500's 24.7% blended earnings growth this quarter.

Magnificent 7 Earnings Set the Tone

Eighty-six S&P 500 companies are scheduled to report this week, with Tesla and Alphabet headlining the slate. The Magnificent 7 — Microsoft, Meta, Amazon, Apple, Nvidia, Alphabet and Tesla — are expected to deliver 31.1% year-over-year earnings growth, outpacing the broader index's 24.7% rate. Excluding Nvidia and Micron Technology, the two major AI chip suppliers, the S&P 500's expected earnings growth would fall to 16.8%.

Alphabet shares have gained about 13% this year but have pulled back roughly 14% from their May highs. Wall Street remains overwhelmingly bullish: 11 of 12 analysts tracked by Visible Alpha rate the stock a Buy, with a mean price target of about $439, implying nearly 25% upside from current levels. The company's Search business is expected to generate $63.29 billion in revenue.

The S&P 500 fell 1.5% last week as weakness in memory chip stocks and escalating geopolitical tensions weighed on markets, with the Magnificent 7 declining 1.1%. Small-cap stocks outperformed, while energy shares rose on higher oil prices.

The earnings reports will provide the first real test of whether massive AI capital spending is translating into revenue growth. Investors will scrutinize Alphabet's cloud segment margins and Tesla's delivery outlook for signs the AI boom is generating sustainable profit growth, with the next catalyst being the companies' earnings calls on Wednesday after the close.

This article is for informational purposes only and does not constitute investment advice.