US Stock 2Q Earnings Focus: Is AI the Next Internet or a Fleeting Phenomenon like the Metaverse? Market Will Keep a Close Eye on These Financial Reports

With the emergence of ChatGPT, there is no doubt that it has brought a glimmer of hope to the declining US stock market. However, after several months, investors have become impatient with the claims that AI will change the world, and the proliferation of AI products has left them feeling overwhelmed and aesthetically fatigued.

While in the first quarter, the market was relatively tolerant of companies that told stories, the second quarter earnings season will require solid performance to prove that AI can truly generate profits. CEOs who have hyped up AI need to demonstrate to shareholders that this technology can actually make them money.

This Friday, major financial stocks such as Citigroup, JPMorgan Chase, and BlackRock will kick off the US earnings season, followed by technology companies like Microsoft, Amazon, and Apple announcing their second-quarter results at the end of July and beginning of August (Microsoft's FY23Q4 report). Whether AI is a revolutionary technology that will change the world like the internet or a fleeting trend like the metaverse will be revealed in the next month.

Popular Targets Await Performance Validation

NVIDIA is one of the biggest winners in the US stock market this year. Even among large technology stocks that benefit from AI, its gains are unparalleled.

Throughout the second quarter, NVIDIA surged more than 51%, far outperforming Alphabet-C (+12%), Apple (13%), Microsoft (16%), and the Nasdaq 100 (15%). At the end of May, NVIDIA's market value surpassed the trillion-dollar mark, making it the seventh company to join the trillion-dollar club.

Many market participants who are bullish on AI use the success stories of companies like NVIDIA to argue that AI is like a new version of the internet. They believe that after the initial hype, AI will permanently change the way businesses operate, just like the internet did back then.

However, looking back at history, every so-called "disruptive technology" has triggered a speculative frenzy in the stock market, such as cryptocurrencies and the metaverse.

But new technologies may not necessarily generate profits; instead, they can lead to massive losses. Meta, led by Mark Zuckerberg, is a bloody example, with its metaverse division accumulating nearly $20 billion in losses last year. Those who went all-in on this technology believing it would change the world ultimately suffered a disastrous defeat.

CEOs are adept at seizing new technologies and telling compelling stories, but actually making money from these technologies is another matter.

Looking ahead to this round of US earnings season, TF Securities believes that the performance of popular stocks will redefine the value of AI.

The analysts wrote:

1. **We believe that the market is currently most concerned about whether there is new incremental growth in the consumer market, what kind of experiences can be sold in the business-to-business market to increase average revenue per user (ARPU), and how much computing power demand can be supported by cloud computing Capex. **

2. We believe that the Microsoft FY23Q4 quarterly report and the NVIDIA FY23Q2 quarterly report may lead to a revaluation of AI. We believe that the downward revision of the growth rate of overseas cloud computing IaaS and SaaS revenues may not have reached its final stage. Cloud computing has already entered a new major cycle. We believe it is worth paying attention to the user growth of Microsoft Cloud, the monthly growth rate of Amazon Cloud, the consumption and pricing discount trends of SaaS, and whether the macro environment and AI have improved the growth rate of enterprise IT spending. We believe that in the second half of the year, Microsoft is expected to benefit from the growth of AI users, and the upward revision of revenue growth in the entire overseas cloud computing sector and the launch of Gen-AI products are closely related, thereby driving the upward movement of capex guidance, marking the beginning of the future cloud computing cycle.

Wall Street Divided, Hedge Funds Fleeing, Bank of America Bullish on S&P 500 Reaching 5000 Points

An ominous sign is that hedge funds are fleeing US stocks in large numbers ahead of this earnings season.

According to an article in the Financial Times on Tuesday, Goldman Sachs' bulk brokerage data shows that hedge funds' investment weight in US stocks has fallen to the lowest level since 2013, while their bets on European stocks have reached a historical high.

Some fund managers believe that the rise of tech giants such as NVIDIA, Apple, and Amazon has led to overvaluation of some companies relative to their earnings potential.

Recently, there have been frequent bearish voices on US stocks and bullish voices on European stocks. According to the latest Markets Live Pulse survey, more than 50% of respondents believe that the upcoming earnings season will be unfavorable for US stocks. Citigroup believes that compared to US stocks, European stocks are historically the cheapest, while JPMorgan believes that the UK stock market is currently the cheapest in the world.

However, AI long-term bull and Wedbush analyst Dan Ives believes that in the coming months, tech stocks will see even greater gains, with the entire tech sector continuing to rise by 12%-15% in the second half of the year.

In a recent report, he wrote:

"Based on our recent research in this field, the second, third, and fourth branches of the AI gold rush are just beginning to develop in the tech industry. We believe this is the 1995 moment of the internet... not the 1999 internet bubble."

He believes that by 2024, the proportion of AI in the overall IT budget will increase from about 1% in 2023 to 8%-10%.

Ives predicts that in addition to Microsoft and NVIDIA, other tech giants and smaller tech companies will also make significant investments in the field of AI, making the second half of the year vibrant for the tech industry.

In addition, Bank of America also predicted last week that driven by the bull market, the S&P 500 index will rise from the current 4400 points to 5000 points.