The “Magnificent Seven” tech giants saw their Q2 profits grow approximately 14% year-over-year, with revenue rising about 11.9%, significantly higher than the average 3.4% profit growth of other companies.
Amid concerns about tariffs, inflation expectations, and waves of layoffs, US stocks still hit new all-time highs. As the US reached trade agreements with the EU, Japan, South Korea, and others, new records for US stocks were constantly being set.
Currently, Goldman Sachs has set a year-end target of 6900 for the S&P 500, while Morgan Stanley believes the likelihood of its bullish scenario (7200 points) is increasing.
This rebound has been led by tech giants. Over the past two weeks, major US tech companies released their earnings reports. Reports from Microsoft, Google, Meta, Amazon, and others all exceeded expectations, with most individual stock prices climbing. In terms of market structure, US stock concentration is currently at an extremely high level. The number of S&P 500 constituents hitting all-time highs is only at the 20th percentile historically, indicating that the current rebound is concentrated in a few leading companies. However, “mean reversion” (a rotation into small and mid-caps) remains difficult to achieve, and tech giants are likely to continue dominating the market going forward.
US Tech Giants Lead the Market Rally
After a correction in Q1, US tech giants staged a strong rebound in Q2, nearly recouping all losses.
Alphabet (Google’s parent company) and Tesla kicked off the reporting season on July 23rd. Alphabet reported robust results exceeding expectations and significantly raised its 2025 capital expenditure forecast. Tesla, however, delivered its weakest quarterly report in years, with revenue decline accelerating from 9% YoY in Q1 to 12% in Q2, its largest quarterly drop since 2012.
This week was dominated by large-cap tech companies, with the most concentrated earnings releases. Microsoft and Meta reported on July 30th, followed by Apple and Amazon on July 31st. Nvidia will report in August.
Profit growth remains paramount. Wall Street expects the “Magnificent Seven” (M7) companies to report overall Q2 profit growth of approximately 14% YoY and revenue growth of about 11.9%, far exceeding the average 3.4% profit growth of other companies.
By the end of Q2, the US Dollar Index had weakened nearly 10%, with the dollar depreciating against the euro by up to 14% at one point. A weaker dollar is generally positive for US stocks. Many large tech companies derive about 60% of their revenue from overseas, with the overall overseas revenue exposure of S&P 500 constituents close to 30%-40%. Therefore, dollar depreciation often enhances the profitability of these international giants, benefiting their stock performance.
Although many still view tariffs as a headwind to growth, our analysis shows that the tariff cost exposure for S&P 500 industry groups is relatively limited, considering the countries/regions involved and existing exemptions (like the USMCA). Simultaneously, we are seeing more deals with major trading partners (e.g., Japan and Europe).
The main tariff risk area is consumer goods, where we maintain an underweight position. The rate of change in policy uncertainty peaked in April, coinciding with the market bottom. Furthermore, earnings guidance trends also bottomed in April, evident in the significant subsequent improvement in earnings revision breadth. Over the next 12 months, capital expenditure (capex), M&A, and broader spending intentions are likely to rise alongside the improvement in EPS revision breadth, a trend that could accelerate as the Fed gets closer to signaling the restart of its rate-cutting cycle.
It must be noted that S&P 500 valuations are expensive, with the forward P/E ratio near historical highs (21.5x-22.5x). However, future profit growth is expected to keep the P/E roughly at these levels rather than push it higher. In the short term, even if the market corrects (mid-to-high single-digit percentage range), investors are likely to view it as a buying opportunity.
Another key point: at the start of the year, the US tech sector experienced a sharp correction, with some leading stocks falling over 30%. At that time, many investors, relying on “mean reversion” thinking, believed overextended tech stocks faced significant downside risk. However, mean reversion strategies proved unsuitable in the current macro environment lacking clear anchors, especially in an era of AI-driven structural transformation. This backdrop has allowed the “Magnificent Seven” to maintain their strength.
Strong Capital Expenditure Intentions Remain
The pace of AI-related capex growth by major tech giants was the biggest focal point this earnings season.
In Q1, the impact of DeepSeek briefly cast doubt on the massive AI capex plans of US tech giants. In February, Microsoft canceled several lease agreements with private data center operators, involving hundreds of megawatts of power. These moves suggested Microsoft might be facing a “supply glut” in data centers. This, coupled with tariff concerns, triggered a collective plunge in tech giants, with cumulative maximum losses nearing 30%.
However, the AI narrative has shifted again: bigger capex is once again seen as better. The reason is that as model training costs decrease and the cost for enterprises to use AI also falls, the total demand for AI is expected to grow continuously. This is akin to how falling electricity and broadband costs eventually led to ubiquitous household adoption, driving explosive growth in overall demand.
For example:
- Meta: Forecasts 2025 capex of $66-$72 billion, primarily for AI infrastructure (data centers, compute clusters). The mid-point represents an increase of about $3 billion from previous guidance, reflecting major investments in its AI “Super Intelligence Lab” and global Titan clusters.
- Microsoft: Expects FY2025 capex to exceed $100 billion, up approximately 14% YoY (FY2024 ~$88 billion). Q1 actual spending was around $21.4 billion (including OpEx & CapEx) on AI talent, data centers, and servers. This budget meets expectations and remains extremely high, showing Microsoft’s aggressive commitment to AI compute and infrastructure.
- Alphabet: Raised its 2025 capex guidance from $75 billion to $85 billion, focused on GPU/TPU server and data center expansion. Q2 capex alone was ~$22.45 billion, up 70% YoY, significantly exceeding market expectations – investors were surprised by the $10 billion increase.
- Amazon: Its 2025 capex budget is ~$105 billion, flat or slightly up YoY, focused on AWS and AI infrastructure. While Q2 base capex wasn’t fully disclosed, accelerating AWS and advertising drove overall spending. This is in line with expectations but remains elevated, reflecting AWS’s core role in the AI strategy.
However, significant divergence exists within the Magnificent Seven. Since Q2, Tesla and Apple are down at least 15%, Amazon and Alphabet are slightly up, while Nvidia, Meta, and Microsoft have gained over 20%. This trend largely correlates with each company’s perceived ability to monetize AI.
For instance, hardware manufacturers like Nvidia benefit first (“pick-and-shovel plays”), followed by hyperscale cloud service providers building massive data centers, and then software developers. While Google and Amazon are cloud giants (Google Cloud, AWS), their vast other businesses somewhat mask the direct impact of cloud/AI profits.
Alphabet itself had plunged earlier on fears its search business could be disrupted by large language models. Fortunately, Q2 results beat expectations thanks to new AI features and a stable digital ad market, with revenue up 14% YoY to $96.4 billion. Search revenue grew +12%, YouTube +13%, and Cloud +32%.
Tesla is undoubtedly the laggard among the giants. Hit by higher tariffs and the expiration of EV tax credits, Q2 revenue was $22.5 billion, slightly below consensus and down 12% YoY. Automotive revenue plummeted 16% to $16.7 billion, with only ~380,000 vehicles delivered in Q2, about 60k fewer than last year. While EPS of $0.40 met expectations, regulatory credit sales declined notably.
Short-term, Tesla faces fundamental headwinds, especially with the impending expiration of the $7,500 US EV tax credit, creating demand pressure. Its brand image in Europe is also under pressure, while competition in China intensifies. Although Tesla’s future profit model centers on “selling software,” development in Robotaxi and humanoid robots is still early-stage, and monetization remains some time away.
Awaiting the Fed Rate Cut Timing
Macro factors will also be crucial going forward. If expectations for Fed rate cuts heat up, the market could react in advance.
At the July 31st FOMC meeting, the Fed failed to signal a September rate cut. The dollar index rose 1% that day and has gained for five consecutive sessions, up 3.9% from its July low.
Fed Chair Powell reinforced a hawkish tone, warning in his press conference that inflation effects might be “more persistent” than previously thought. However, he also noted inflation is now “roughly near 2%” and reiterated previously cited reassuring factors, like the gradual easing of lagging inflation components.
We believe Powell’s overall economic assessment suggests that while lowering rates soon would be reasonable and not pose an inflation risk, it’s not yet necessary. Although slowing activity and downside risks in the labor market provide some rationale for easing, a rising unemployment rate (not yet seen) would be a stronger catalyst for cuts.
Nevertheless, Wall Street still expects three 25-basis-point rate cuts this year (September, October, December), followed by two more in 2026, bringing the terminal rate down to the 3%-3.25% range. However, uncertainty remains as two more rounds of employment and inflation data will be released before the September meeting.