Prediction: Oct. 21 Will Be a Huge Day for the Stock Market
Key Points
AI stocks have helped the S&P 500 soar in recent years.
But this year investors have started worrying about the levels of investment big tech is pouring into AI, and this has periodically weighed on stock performance.
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Artificial intelligence (AI) stocks have led this bull market over the past three years, pushing the S&P 500 to record highs. Investors were eager to get in on this promising technology early on, and in many cases, they've already greatly benefited. For example, chip designers such as Nvidia and Advanced Micro Devices, as well as cloud companies like Alphabet, have seen revenue and stock performance march higher.
In recent weeks, though, AI stocks have faced various headwinds, from general concerns about the economy to questions about AI spending. The spending issue has emerged as a key risk: If the revenue opportunity doesn't match these companies' spending levels, their earnings and stock performance could suffer.
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Considering this, investors are seeking clues about the future AI opportunity. And they might gather some on Oct. 21, after the market closes. For this reason, my prediction is that this day and the one to follow might be huge for the stock market. Let's find out exactly what's on the agenda and zoom in on the details.
Image source: Getty Images.
Earnings season for tech giants
So, what's happening on Oct. 21? The first of the "Magnificent Seven" companies involved in the AI race is set to report third-quarter earnings. These companies are Amazon, Alphabet, Apple, Meta Platforms (NASDAQ:META), Microsoft, Nvidia, and Tesla. Earnings season kicked off earlier this month, with reports from financial companies, and as of this week, the biggest tech companies will begin reporting.
And the company to kick things off is Meta. You might best associate this tech giant with social media, due to its ownership of Facebook, Messenger, Instagram, and WhatsApp. These are among the world's most popular social media apps, with 3.6 billion people using at least one every day. They also have been the major driver of revenue for Meta, with advertisers paying to access space across these apps.
In the latest quarter, this generated a 28% gain in total revenue to $60 billion, with ad revenue making up $59 billion. And over time, this revenue stream has pushed earnings higher.
In recent years, though, Meta broadened its focus to include AI -- and it's betting heavily that this business will be a major part of its future earnings opportunity. Meta has spent billions of dollars on data center build-out, the development of its own large language models, and the hiring of a rock-solid team of AI experts to lead the way.
Investing in AI infrastructure
As this started to unfold, some investors worried about the levels of investment, and this weighed on Meta's stock performance during certain moments of the AI story. Meta's capital spending-to-revenue ratio, a metric measuring the revenue reinvested into assets, has reached about 35%. And considering Meta's AI ambitions, this ratio could continue to climb.
META CAPEX to Revenue (Annual) data by YCharts
On Wednesday, as Meta's fresh earnings report unfolds, investors will be looking to see how much capex might grow in the quarters to come and, importantly, whether this spending is translating into growth for Meta. This may offer us clues about the earnings opportunity ahead for this particular company, and it also might provide a few early hints about what to expect from other "Magnificent Seven" companies when they report earnings in the coming days.
There's reason to be optimistic, considering Meta recently launched a key product, its personal AI agent Muse -- and downloads reached record levels. Though these have been free downloads, the app also offers subscriptions for those who aim to use it more. This represents Meta's initial attempts to monetize its AI investments.
Any positive trends noted by Meta could boost the stock and could also lift other AI shares as investors anticipate more good news from other tech giants in the days to come. All of this may happen as early as Thursday, the first trading session after the report. And given AI stocks' major role in stock market movement, Meta's report could offer the S&P 500 direction in the days to come.
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Adria Cimino has positions in Amazon and Tesla. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool has a disclosure policy.
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