A Make-or-Break Week for the AI Trade?

This week is likely to be key for the U.S. markets as investors shift their focus from geopolitical tensions to corporate earning. After a volatile start to 2026 driven by trade war concerns over Greenland, attention now turns to whether America’s largest technology companies can justify their lofty valuations and deliver on artificial intelligence promises.

Roughly one-fifth of the S&P 500 will report fourth-quarter results this week, including four members of the “Magnificent 7″—Apple, Microsoft, Meta Platforms, and Tesla. These reports arrive at a moment when the market can ill afford disappointment. With the S&P 500 trading at 22 times forward earnings—significantly higher than the 15.9 historical average—the market is currently priced for perfection. To sustain these valuations, corporate earnings must meet or surpass analyst forecasts.

Despite these elevated valuations, the backdrop remains constructive. The American index has delivered three consecutive years of double-digit returns and starts 2026 up about 1%. Earnings are expected to climb 15% this year, with growth broadening beyond the mega-cap technology leaders that have dominated recent gains.

Fourth Quarter Performance: Solid but Below Average

Early results from Q4 2025 show the earnings season is progressing steadily, though without the typical fireworks. Of the 59 companies reporting through last Thursday, 81% have beaten analyst estimates. However, this success rate of 75% (with positive EPS surprise) for the full 13% of the index that has reported its earnings falls short of the five-year average of 78% and of the ten-yeanr average of 76%. The magnitude of these beats—5.3% above estimates—also trails historical values of 7.7% for the five-year average and the 7% for the ten-year average.

Still, the S&P 500 is poised to extend its winning streak to a tenth straight quarter of year-over-year earnings expansion, with Q4 currently sporting a blended growth rate of 8.2%. Revenue growth of 7.8% would mark the 21st straight quarter of expansion and the second-highest rate since mid-2022 where it reached 11%.

The Magnificent 7 Continue to Lead, as Technology Sector Dominates

The technology giants remain the primary engine of profit growth, though their dominance is showing signs of moderating. Market growth remains top-heavy, powered largely by NVIDIA, Alphabet, and Microsoft, with Boeing and Micron rounding out the top five contributors to S&P 500 earnings growth this quarter.

Overall, the Magnificent 7’s expected 20.3% growth rate highlights a massive performance gap compared to the 4.1%anticipated for the remaining 493 stocks in the index. For 2026, analysts anticipate these tech leaders will grow earnings by 22.8%, compared to 12.1% for the rest of the market.

Information Technology leads all the eleven sectors with 26.2% earnings growth, driven primarily by the semiconductor industry’s 47% expansion. NVIDIA alone contributed significantly to this performance, with earnings surging from $0.89 to $1.52 per share year-over-year. Without NVIDIA, the sector’s growth rate would fall to 18.5%.

The sector’s profit margins have also expanded, reaching 28.6% compared to 26.8% a year ago and well above the five-year average of 24.7%. This improvement in profitability, combined with robust revenue growth, demonstrates the sector’s pricing power and operational efficiency.

The AI Question Looms Large

As AI investments reach unprecedented levels, investors are demanding proof of profitability. This earnings season, the market’s primary focus is whether the billions poured into AI infrastructure are finally yielding tangible financial returns and measurable productivity gains. Skepticism about the payoff from billions spent on data centers and infrastructure weighed on tech stocks late in 2025, creating pressure for management teams to show concrete results.

Investor patience for the AI buildout is wearing thin after it powered the bull market’s first three years. Companies will need to articulate clear paths to monetization and provide evidence that AI is beginning to drive revenue growth, not just increase costs.

Of course, beyond the immediate results, guidance for 2026 will be crucial. Analysts currently project earnings growth of 11.2% in Q1 and 14.5% in Q2, building to the full-year estimate of 14.7%. For the first quarter, early guidance has been mixed, with six companies issuing negative outlooks compared to four providing positive projections.

The Federal Reserve meeting this week adds another dimension, as interest rate expectations will influence how investors value future earnings streams, particularly for growth-oriented technology companies.

With 103 S&P 500 companies scheduled to report in the coming days, including 12 Dow components, investors will quickly learn whether corporate America can support current valuations and whether the market’s AI-driven rally has solid fundamental underpinnings or requires a reset.

Big Earnings Coming Up

Microsoft – Wednesday 28 of January

• EPS Estimate: $3.92
• Revenue Estimate: $80.28B

Meta Platforms – Wednesday 28 of January

• EPS Estimate: $8.19
• Revenue Estimate: $58.41B

Tesla – Wednesday 28 of January

EPS Estimate: $0.45

• Revenue Estimate: $24.75B

Apple – Thursday 29 of January

• EPS Estimate: $2.68
• Revenue Estimate: $138.47B

Sources: Wall Street Journal, Reuters, FactSet, Seeking Alpha

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