The earnings season for American stocks is fast approaching, drawing significant attention from investors and analysts alikeThe focus is particularly sharp on a select group of technology giants commonly referred to as the "Magnificent Seven," which includes major companies like Alphabet (Google's parent company), Amazon, Apple, Meta (formerly Facebook), Microsoft, Tesla, and Nvidia.

Against the backdrop of a heated race in generative AI, these tech behemoths are set to dramatically increase their capital expenditure plans for 2025. However, recent breakthroughs in technologies by lower-cost players like DeepSeek have caused market upheaval

This comes alongside warnings from analysts about the overheated valuations of U.S. stocks, casting a shadow over the frenzy of investments in the tech sectorThere seems to be an impending challenge as tech stocks grapple with the narrative of growth being driven purely by capital accumulationMany expert analysts predict that the industry may soon witness a pivotal shift towards profit-driven strategies and a necessary re-evaluation of valuations.

A Tale of Growth and Challenges

This billing season reveals a contrasting narrative of results, where the performance of tech giants oscillates between prosperity and setbacks.

On February 7, 2024, Amazon shared its earnings report concluding on December 31, 2024, showing a revenue of $187.79 billion, slightly surpassing the anticipated $187.3 billion—a 10% increase from $170 billion from the previous year

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The company’s net profit soared to $20 billion, nearly doubling from $10.6 billion year-over-year.

Despite outperforming revenue and profit expectations, Amazon’s cloud computing revenue fell short of projections, registering a 19% year-on-year growth but lagging competitorsThis led to a disappointing performance guide that saw Amazon’s after-hours trading plummet by over 7%.

Similar patterns emerged for Microsoft's and Alphabet's cloud businesses, which also failed to meet forecasted expectations.

Microsoft's fiscal Q2 report for the year ended June 30, 2025, revealed a revenue of $69.632 billion, a 12% increase, and a net profit of $24.108 billion, up 10% year over year

However, its commercial cloud revenue missed expectations at $40.9 billion against the predicted $41.1 billion, indicating a growth rate of 21%.

In its Q4 earnings report, Alphabet revealed revenue of $96.469 billion for the quarter, experiencing a 12% growth but falling short of market expectations of $96.56 billionThe company's net profit reached $26.536 billion, marking an impressive 28% uptick, with earnings per share of $2.15, slightly above the expected $2.13. Notably, its cloud revenue growth dropped to 30%, at $11.96 billion, down from a 35% increase in Q3, suggesting mounting concerns.

Tesla was one of the first to release its earnings among the "Magnificent Seven," but its results flashed red

The company’s revenue for 2024 totaled $97.69 billion, reflecting only a 1% growth, contrasted sharply with a devastating 53% plummet in net profitThe fourth quarter displayed a mere $25.7 billion in revenue, up by only 2%, while net profits nosedived by 71%, pointing to tightening profit margins.

Tesla's core automotive operations are grappling with dual challenges: lagging sales growth and declining profitabilityDeliveries for the year came in at 1.789 million vehicles, a slight 1% decrease, and average revenue per vehicle saw considerable declines, with gross margins hitting historic lows.

In stark contrast, Apple and Meta presented exceptionally strong earnings reports that exceeded expectations.

Apple's revenue and profit reached new heights, with CEO Tim Cook declaring it the company’s best quarter ever

For the first fiscal quarter of 2025 ending on December 28, the company's revenue reached $124.3 billion, a 4% annual growth, and net profits stood at $36.3 billion, showing a 7% increaseThe diluted earnings per share were reported at $2.40, up 10% year-over-yearNonetheless, concerns lingered as iPhone revenue declined by 3%, and sales in Greater China dropped by 13%, hinting at stagnation amidst market saturation and geopolitical pressures in the high-end smartphone sector.

Meta saw its fourth-quarter revenue ascend to $48.39 billion, marking a 21% increase, with full-year revenue up 22% to $164.5 billionThe quarterly net profit surged 49% to $20.84 billion, translating to a diluted earnings per share of $8.02. The bulk of the revenue is still driven by its core digital advertising segment, contributing $46.78 billion, and achieving 20% growth

Notably, Meta's user base continues to expand, with daily active users climbing to 3.35 billion, up from 3.29 billion in the previous quarter, propelled by accelerated commercialization of its Reels short-video platform and the efficiency enhancements of its AI advertising system.

Nvidia is set to announce its earnings on February 26. The company finds itself in the middle of a market maelstrom due to the competitive pressures exerted by DeepSeek and other factors like tariffsInvestors are questioning Nvidia's growth prospects as they await financial disclosures.

Capital Expenditures Surge Towards AI

As generative AI trends sweep through the globe, tech titans like the aforementioned "Seven" are massively ramping up their capital expenditures.

According to research from Societe Generale, the “Magnificent Seven” is poised for a 40% growth in capital expenditures for 2024, compared to a mere 3.5% increase seen among other S&P 500 companies

The trend toward heightened capital investments is expected to carry on into 2025.

Amazon plans to escalate its capital expenditures from about $83 billion last year to a whopping $100 billion by 2025, concentrating significantly on cloud computing and AI servicesIn Q4 alone, capital expenditure jumped to $27.8 billion, up from $14.6 billion in the same period last year, signaling a robust investment appetiteCEO Andy Jassy underscored the commitment to AI, mentioning new endeavors like the AI model, Nova, and the in-house developed Trainium chips.

Alphabet too has laid plans to invest about $75 billion in capital expenditures by 2025, focusing heavily on infrastructure geared towards AI

This figure outstrips analyst expectations of $57.9 billion and marks a 44% increase from the $52 billion investment in 2024.

CFO Anat Ashkenazi indicated a robust demand for AI products observed in Q4, suggesting a tight supply situation, thus laying out ambitious plans to scale production capabilities in 2025. Alphabet's investments mainly target servers, data centers, and networking elements instrumental for AI model training and deploymentThe company is also exploring potential applications of AI in enhancing its advertising business to further boost ad performance and user experience.

Meta anticipates capital expenditures falling in the range of $60 billion to $65 billion in 2025, chiefly directed toward bolstering generative AI alongside core business investments

CEO Mark Zuckerberg has dubbed 2025 as “the year of defining AI,” with plans to construct a data center boasting over 2 gigawatts of capacity while substantially enlarging the AI workforceMeta is aiming for over 1 billion users for its AI assistant by the end of 2025 and intends to launch an upgraded version of the Llama 4 large language model, enhancing its competitive stance in the AI realm.

Microsoft is not lagging on AI investments either, planning to inject $80 billion into constructing AI data centers by FY 2025, despite the latest quarter’s capital expenses standing at $15.8 billionThe investments in AI are aimed at enriching its cloud services and fostering the development of AI applications to meet surging demand.

In contrast, Apple has taken a more measured approach towards AI investments

Tim Cook noted that the company always employs a cautious strategy concerning capital expenditures and will continue utilizing a hybrid method to advance its AI strategyApple is focused on seamlessly integrating AI within its existing products and services to bolster user experience and product competitivenessReports indicate that Apple has been optimizing on-device AI capabilities through custom chip designs, and the rumored Apple GPT may have deep integrations in the upcoming iOS 18. This collaborative "hardware-software" approach hasn't disclosed specific investment figures but reveals a consistent high R&D expenditure rate of 7.5% over three consecutive quarters.

Shockwaves From DeepSeek

The substantial investment into AI by these major tech players has raised questions regarding the actual returns—one of the hot topics surrounding U.S. technology giants

As the earnings reports unfold, the emergence of DeepSeek’s remarkable rise shook the tech investment landscapeDeepSeek has remarkably achieved performance comparable to that of OpenAI at significantly lower cost, causing capital market panic.

On January 27, Nvidia's stock plummeted approximately 17%, with Microsoft, Google, and Meta collectively seeing a market cap erosion exceeding $400 billion.

Sundar Pichai, CEO of Alphabet, has expressed admiration for DeepSeek, highlighting that the reduction in AI usage costs could foster a wider array of AI applications, thereby presenting a large opportunity for Google.

Mark Zuckerberg echoed similar sentiments in a conference call, stating that Meta is evaluating and adapting the technological advancements brought by DeepSeek into its own models

He emphasized that while the increased inference-related computation may demand greater resources, the strategic capital expenditure and infrastructure investments will provide long-term benefits.

Vey-Sern Ling, managing director at Union Bancaire Privee, noted that DeepSeek might disrupt the investment dynamics across the entire AI supply chain, which has previously been driven by substantial spending from a select few mega-cap firms.

BlackRock's investment research team pointed out that DeepSeek's more efficient AI models could significantly affect capital expenditure patterns in the AI sector and potentially trigger further market volatility.

Morgan Stanley Wealth Management indicated in a recent report that since the United States stock market entered a bull run in 2022, the S&P 500 index surged nearly 70%, but it is now beginning to show signs of fatigue

They noted two fundamental factors alongside technical aspects; the Federal Reserve's recent pause on interest rate cuts and the sell-off ignited by DeepSeek's low-cost AI innovations.

Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, commented on the potential shift in the core contributors of the bull market from the U.S. "Magnificent Seven" stocks to value stocks, cyclicals, and long-term performance growth sectors that are not reliant strictly on generative AI.

Shalett believes, “The narrative of the bull market in the U.S. is changing; we are transitioning into a full normalization phase driven by the standardization of interest rates and market valuations, with profit growth re-emerging as the primary force for the stock market and expectations of reduced concentration in S&P 500 market capitalizations.”

Ray Dalio, founder of Bridgewater Associates, warned that investor enthusiasm for AI has fueled a “bubble” in the U.S. stock market, comparable to the years leading up to the dot-com crash. "Valuations have reached elevated levels while interest rate risks loom ahead; this combination could very well pop the bubble."

Goldman Sachs strategist Peter Oppenheimer cautioned that the growth in stock prices for the U.S. market, tech stocks, and large enterprises reflects underlying fundamentals rather than an irrational bubble