As Big Tech gears up for a critical earnings season, the performance of US tech stocks could send ripples through ASX shares, just as it has in the past.
And there's one group that could have a particularly strong impact.
Over the decades, certain nicknames have been given to groups of stocks that have held outsized importance in market indexes.
In the 1960s, there was the 'Nifty Fifty', an index of 50 large-cap stocks thought to be literally unbeatable at the time.
Then, in the mid-to-late 90s, we had the 'dot-com boom', the name given to the swaths of newly-formed internet companies that were thought to be unbreakable.
Investors may or may not be familiar with the latest grouping, dubbed the 'Magnificent 5' (formerly the Magnificent Seven).
These are the US tech giants of Apple Inc (NASDAQ: AAPL), Meta Platforms Inc (NASDAQ: META), Alphabet Inc (NASDAQ: GOOGL), Microsoft Corporation (NASDAQ: MSFT), and Amazon.com Inc (NASDAQ: AMZN). More recently, the list has included NVIDIA Corp (NASDAQ: NVDA) as well.
They are called 'magnificent' because, as a basket, they have delivered market-beating returns for investors for the past five years or more.
More importantly, however, as a group, the five stocks make up over 20% of the US equity benchmark, the S&P 500 Index. Put simply, this is market concentration at its extremes.
And this level of concentration means that moves in these shares will likely have outsized impacts on the S&P 500, and, very likely, on ASX shares.
So, with the earnings season of US tech shares set to begin this week, Aussie investors better brace for the potential impact on ASX shares. Let's take a closer look.
Will US tech earnings impact ASX shares?
The magnificent five — Alphabet, Meta Platforms, Amazon, Apple, and Microsoft — are set to report this week, while Nvidia will report in early November.
Their outsized weighting in the S&P 500 index means their performance will impact market sentiment big time. This could influence ASX shares.
Analysts are particularly focused on revenue growth driven by artificial intelligence (AI) and advertising.
Firms like Microsoft and Google are expected to showcase their latest AI advancements and revenue sources.
Meanwhile, NVIDIA's earnings report in November will be closely scrutinised.
Up more than 193% this year, the stock has created many millionaires. But the chipmaker's role in the boom places it front and centre of the AI arms race.
Investors are expecting huge things from the company as well, pricing its stock at more than 66 times trailing earnings.
Investment firm Global X expects a mixed set of results from the group, according to The Australian Financial Review.
Overall, we expect big tech earnings next week will display a mix of steady operational performance, AI-led revenue acceleration, and resilient advertising that signals ongoing health and innovation.
More so, we expect to see further evidence of generative AI moving along its growth curve and continued shift from experimentation to widespread monetisation.
What does this mean?
If Big Tech reports reveal plenty of AI-driven growth, sentiment could flow into ASX shares. It could also flow to other sectors poised to benefit indirectly, such as data centres and telecommunications.
A strong earnings report from these companies could reinforce the market's confidence in the technology sector.
And if this year's performance is anything to go buy, Aussie investors have been rewarding tech stocks with outsized returns.
Whereas the S&P/ASX 200 Index (ASX: XJO) is up 8% this year to date, the S&P/ASX All Technology Index (ASX: XTX) has climbed nearly 30%. Talk about a significant advantage.
However, any disappointing results could temper enthusiasm across the tech sector globally. We saw this in 2022.
Expectations are exquisitely high. And we know what happens when expectations aren't met.
Keep a close eye out for the flow on effects in any outcome.
Foolish takeout
AI continues to be a crucial driver for ASX shares. But the pressure to show profit from AI investments is mounting.
While enthusiasm remains, the 'Mag-5's earnings schedule this week is to be watched very closely. It could make or break things.
