Megacap Tech Earnings to Test Market Rally After Weekly Sell-Off

U.S. stock markets face a pivotal week as investors await second-quarter earnings from several technology giants, which could determine the next leg of the AI-fueled rally. The reports follow a losing week on Wall Street that saw a significant pullback in the previously high-flying semiconductor sector.

Wall Street's Weekly Setback

Major U.S. indices ended last week in negative territory as a sell-off in technology shares broadened. The market action capped a losing week for the major averages, according to data from Investing.com.

• The S&P 500 fell 1.6% for the week.
• The tech-heavy Nasdaq Composite dropped 2.9%.
• The Dow Jones Industrial Average lost 0.9%.

The semiconductor industry was hit particularly hard. The Philadelphia Stock Exchange Semiconductor Index recorded its worst weekly performance in over a year and has declined more than 18% in July alone, the source material noted.

Earnings Season Takes Center Stage

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The pace of the Q2 earnings season accelerates this week with highly anticipated results due from Alphabet (NASDAQ:GOOGL), Tesla (NASDAQ:TSLA), Intel (NASDAQ:INTC), and IBM (NYSE:IBM). Investors will scrutinize these reports for insights into capital spending plans by major AI "hyperscalers," which has been a primary catalyst for the market's record-setting run.

Any indication that the heavy investment phase in AI infrastructure is slowing could unnerve investors and potentially extend the recent market pullback. So far, the earnings season has started strong. Of the 49 S&P 500 companies that have reported, 90% have surpassed analyst expectations, according to data from LSEG. LSEG data also shows analysts now project year-over-year S&P 500 earnings growth of 26.0%, a significant increase from the 19.2% expected at the start of the quarter.

Analyst Outlook: Rotation and Consolidation

Market analysts see the recent weakness as part of a broader market rotation and period of consolidation rather than the end of the bull market. Strategists at Morgan Stanley noted their "broadening thesis continues to play out as the index struggles to make headway and former leaders correct."

JPMorgan said it is a "proponent of rotation" in the second half of the year but does not expect prolonged market weakness. The firm noted that semiconductor stocks, despite recent pressure, "should soon start to find a bid." Yardeni Research suggested a plausible scenario through September involves sideways consolidation and "pullbacks that attracted dip buyers," maintaining its year-end S&P 500 target of 8,250.