The big test for tech stocks arrives this week, with Apple and Amazon set to define industry trends

This earnings season for tech giants is likely to be surprising or disappointing, depending on the performance announced by Apple (AAPL.US) and Amazon (AMZN.US) later on Thursday.

According to Zhitong Finance APP, these two earnings reports are the last ones released by the seven major giants, aside from NVIDIA. Prior to this, the performances of Microsoft (MSFT.US) and Meta (META.US) failed to impress investors, leading to a decline in their stock prices and dragging down the market. Before that, Alphabet (GOOGL.US) reported better-than-expected results on Tuesday, and Tesla (TSLA.US) also announced better-than-expected results last week.

Strong performances from Apple and Amazon could reinforce the notion that large tech stocks remain Wall Street's most reliable trades. However, if disappointing results are announced, combined with the index weight and price-to-earnings ratio of these two companies, it could dampen market hopes of returning to record levels.

AJ Bell's Investment Director, Russ Mould, stated, "The bar has been set high because valuations are high. Investors have become accustomed to the seven giants and tech and AI-related companies not only exceeding expectations but also breaking them—then raising guidance for the next quarter."

Investors are looking forward to Apple ultimately providing specific information about the demand for AI-enabled iPhones, as they hope this product cycle can help the company emerge from a low-growth era.

Amazon's report will provide insights into the consumer status of its e-commerce business, while the results of its cloud computing business will show the tailwinds brought by artificial intelligence, similar to reports released by Alphabet and Microsoft.

This year, the stock prices of Apple and Amazon have risen in sync with the market, both increasing by more than 19%, as has the Nasdaq 100 index.

Due to the market's negative reaction to Microsoft (whose revenue growth exceeded expectations) and Meta (whose sales exceeded expectations), the outlook for the earnings reports of these two companies on Thursday is also not optimistic.

Microsoft's stock fell sharply in pre-market trading on Thursday due to the company's disappointing forecast for its Azure cloud computing business and its reaffirmation of plans to increase spending to expand AI services. Meta's stock price also declined as the company ramped up investments in AI and other future technologies.

Apple is particularly vulnerable. The company is expected to see revenue growth of less than 2% in fiscal year 2024, although Wall Street anticipates that revenue growth will accelerate to 7.6% in fiscal year 2025, which is still far below other large stocks that have maintained double-digit growth. However, the company's price-to-earnings ratio is 31 times, more than 50% higher than its 10-year average Wall Street has become increasingly cautious, especially in light of signs that consumer interest in the latest iPhone is limited. This month, the stock has been downgraded twice, with KeyBanc and Jefferies both stating that the optimism has been overstated. Amazon has also been rarely downgraded this month, with Wells Fargo Securities indicating that the company's cloud business may not be able to offset concerns about profit margins.

Amazon's stock price may also be in a volatile state, having recovered some ground after its earnings release in August, but still below the highs of July. Alphabet's report can be seen as a positive sign for Amazon's AWS cloud division, as investors will also be watching whether the company's significant investments in artificial intelligence can yield returns.

"What I heard on the Google conference call makes me very optimistic," said Mark Malik, Chief Investment Officer at Siebert Financial Corp. "Assuming Amazon can make similar discussions about cloud computing, how they are profitable, and their customers, I think that is crucial for them."

Analysts expect Amazon's AWS business revenue for this quarter to be around $27.5 billion, a year-over-year increase of over 19%. John Belton, portfolio manager at Gabelli Funds, stated that if Amazon fails to meet this expectation, "the narrative of AWS losing market share in cloud infrastructure may start to gain traction."

Amazon's investors will also closely monitor the profit margins of its cloud computing and retail businesses for signs of growth.

James Abate, Chief Investment Officer at Centre Asset Management LLC, stated that Amazon needs to "demonstrate some degree of positive momentum in margin improvement." "Given the significant infrastructure investments AWS is making, it is very important that we see its margins continue to rise."