Mag 7 ETF Investors Eye Big Tech Earnings, PCE

Tesla’s earnings report after the bell Tuesday reenergized the Magnificent 7. Will other mega-cap tech stocks follow suit this week? 

Investors cheered news that the Austin, Texas-based electric vehicle pioneer reported that it would accelerate plans to produce more affordable cars. 

Shares of Tesla, Inc. (TSLA) were up 11% in post-market trading Wednesday and exchange-traded funds with heavy TSLA exposure like ARK Innovation ETF (ARKK) and the Roundhill Magnificent Seven ETF (MAGS) were trading higher off multi-month lows this week. 

The growth stock proxy Invesco QQQ Trust (QQQ), which is the largest ETF to include all the Mag 7 stocks in its top 10 holdings, has rebounded from a 5% correction off its all-time high of roughly $445, last touched on April 11. 

The Mag 7 bull run, which has largely supported the growth of the broader stock market in the past year, faces more tests this week as investors analyze Q1 corporate earnings from Meta Platforms, Inc. (META), which reported after the close Wednesday, as well as Alphabet Inc. (GOOG) and Microsoft Corp. (MSFT), which report Thursday. 

The Mag 7’s recent struggles have resulted from a combination of profit taking and a shift in market sentiment as investors grow increasingly skeptical that high-flying tech stocks can regain their incredible momentum. 

Tech ETFs and PCE Inflation

Following the string of big tech earnings this week, investors will get a glimpse of inflation’s progress with the Personal Consumption Expenditures (PCE) Price Index report due Friday morning.  

The PCE, the Federal Reserve’s preferred measure of inflation, can have a big impact on technology stocks and other growth-oriented securities, as growth stocks are typically priced based on the expectation of their future earnings potential. 

ETF investors will be watching for signs that inflation is leveling off or beginning to slow after three consecutive months of increases. Slowing inflation would renew hopes that the Fed can lower interest rates, which can help to decrease the discount rate used to calculate the present value of a company’s future earnings. This generally leads to an increase in perceived value of growth stocks, causing their prices to rise in ETFs that hold them.  

The expectation for falling rates, as well as growing earnings for tech stocks and their interest rate sensitivity, explains why growth stock ETFs have dramatically outperformed the broader market since inflation has declined markedly from its June 2022 high of 9.1%. 

While this week’s big tech earnings, ending with the PCE report Friday, could all be positive and push the Mag 7 stocks and the S&P 500 index higher, investors are wise to remain cautious ahead of these reports.