Investors still need proof of profit from AI: Strategist

The rose-colored glasses are off for investors looking at the Magnificent Seven stocks, now apparent in the tech giants that have already reported earnings. What does this shift suggest about the landscape of the market?

Synovus Trust Senior Portfolio Manager Daniel Morgan joins Yahoo Finance Live to discuss changes in investor sentiments toward Magnificent Seven.

Morgan states that many investors are keeping a close eye on “AI-related tools,” to gauge its effectiveness and longevity: “We’re just looking for more evidence that AI is coming to fruition and it's actually pouring down to the bottom line, in terms of profit.” Morgan believes that tech stocks are “priced to perfection,” but signs of profit, specifically from AI is key, noting “there isn’t a lot of room for error.”

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Eyek Ntekim

Video Transcript

RACHELLE AKUFFO: Well, of course big tech companies once could do no wrong now investors seem to be holding them to extremely high standards. The first three Magnificent Seven companies to report saw their stocks punished for their minor misses and less than mind blowing forecasts. Beats on the top and bottom lines aren't even being rewarded anymore. With Apple Amazon and Meta on deck, what could the market have in store next? Joining us now is Daniel Morgan, Synovus trust senior portfolio manager. Good to have you on the show here.

DANIEL MORGAN: Hi Rachelle

RACHELLE AKUFFO: So we've come from a point of you could barely find a bear on Wall Street where we were coming into that December tech rally, but where are we now that we're sort of marinating on some of the misses that we saw in the outlook for Microsoft and Google, and now heading into the rest of the Mach seven?

DANIEL MORGAN: Well it's interesting Rachelle because obviously Tuesday we had Alphabet come in with numbers. As everyone knows and you've reported and you just discussed, they missed on advertising revenues. YouTube revenues were up about 15.5%, GCP, which is their cloud service, was up about 25%. So we kind of take those numbers and we roll those into Meta we know that consensus, as you just mentioned, is looking for ad revenues up 20%. So that's double what we saw from Alphabet.

And then we also roll that GCP number into AWS, and we're expecting AWS, which is Amazon's data center service, to be up roughly about 13%. So those are the kind of numbers we derived from that. And then as you were talking about earlier, everyone's trying to see some more evidence Rachelle that we're getting some sort of impact from AI.

As you mentioned earlier on the Microsoft call they said that Azure was up 30%. Six percentage points of that came from AI-related tools. So we're trying to see if we can get that same effect coming out of, let's say, Amazon with AWS where we're all looking for 13.5% growth but they beat the number. And the reason that they beat it was because of the enhancement tools using AI. So again, Rachelle, we're just looking for more evidence that AI is coming to fruition and it's actually pouring down to the bottom line in terms of profits opposed to just a bunch of talking points on a conference call.

- Well Daniel I guess the question for me is how much strength do these companies need to show in order to push that stock a leg higher? You look at somebody like Microsoft, I mean you broke down the numbers for Azure, but overall, they were up in terms of expectations key metrics, and yet we saw that stock fall. So how much of that is about profit taking. This expectation that this is as good as it gets or how much of this is about disappointment in the financials?

DANIEL MORGAN: Well you're right. I mean the tech stocks are priced to perfection right now, and there are a lot of people kind of scratching their heads in regards to how long can we talk about AI, how long can we talk about all this CapEx that you're going to spend on it, and when do we start to get back results. So I think you bring up a good point, which is we know that Microsoft hit the $3 trillion mark a couple of weeks before they had their report. Stock really ramped up. Everybody's very excited about it now is in the same camp with Apple.

But yeah it does seem like there isn't a lot of room for error. Not only do you have to hit all your numbers, but you've got to give something more. And Microsoft really did deliver that and yet, kind of like Alphabet, the stock price afterwards was kind of muted. So it does seem to me that the stocks have gone up so much in value, the expectations have been so high related to AI that when the companies do report, even if they do a great job, the stocks pull back. So there's just not a lot of room for error right now in the Magnificent Seven.