AI Remains Focus of Second-Quarter Tech Earnings

After stumbling in April, info tech stocks ended up enjoying a stellar second quarter. Investors now await earnings and guidance from the biggest players in artificial intelligence, cloud, chips, and software, wondering what they can do for an encore and how long the good times can roll.

It's no secret that AI is the big story, with mega cap Apple (AAPL) getting a major Q2 boost after announcing new plans to incorporate the technology across its devices. While chip firms scooped up most investor dollars aimed at AI earlier this year, Apple's ascent and the rally in shares of large software, hardware, and internet ad companies showed there's power here beyond semiconductors alone.

But AI is costly, and tech firms continue to run up large bills buying the chips they need to run it even as they hope to cut out the middleman to some extent with their own chips. This raises concerns about margins, so guidance might prove more influential in some respects than quarterly results, barring any large hits or misses.

Nearly all mega-cap tech stocks trade at relatively high valuations, historically, meaning investors might expect them to surprise even more to the upside on both Q2 results and guidance than average analyst estimates. Failure might lead to selling, with investors recently demonstrating willingness to punish firms harshly for coming up short when valuations are high. Still, it's been a familiar theme for money to flow into tech with bullish momentum this year.

"With Q2 earnings season around the corner, the question is whether these companies will be able to deliver enough to satisfy lofty expectations," said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research.

Another question, he added, is how quickly companies can monetize AI after spending so much on AI infrastructure, and when they'll start discussing actual revenue figures generated by their AI initiatives. So far, investors haven't demanded much evidence, but that could start to change.

"Everyone assumes demand will be monumental," Peterson said. "Is this the quarter where investors need to see more evidence of demand for AI-enabled offerings from software and IT services companies, or will they get a pass for another quarter?"