Tech earnings could make or break market rallies

As earnings reports continue to be released, many investor eyes remain on the Magnificent Seven to hopefully produce positive results to continue the recent tech rally launching the S&P 500 (^GSPC).

Michael Arone, Managing Director of State Street Global Advisors, joins Yahoo Finance to discuss the performance of the Magnificent Seven during this earnings season and give insight into what investors should keep an eye on.

"We still like the technology sector. We like the fact that earnings momentum continues to be quite strong, price momentum continues to be quite strong. We like the AI phenomenon. We believe it's real. It will drive productivity gains. It will drive sales gains from that perspective," Arone explains. "Despite the rich valuations, tech has a lot going for it. We still like technology. But to balance that out a little bit, we do like energy companies and we also like industrials."

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 Nicholas Jacobino

Video Transcript

BRAD SMITH: As investors anticipate, the Magnificent Seven will live up to their sky-high expectations. And with earnings seasons well underway, our next guest believes quarterly results from Microsoft and Alphabet could change the course of what is currently a weak earnings season. He joins us now. Michael Arone, managing director of State Street Global Advisors and chief investment strategist. All right. So Michael, if we're in a weak earnings season right now, what are these companies going to say to turn things around?

MICHAEL ARONE: So I think what's happening here, Brad, is that the Magnificent Seven expectations for earnings and revenue growth are sky high. So if these companies are able to surpass those very high expectations, I think this will continue to drive the market higher. The risk here is that they are priced for perfection.

Valuations are certainly stretched from that standpoint. So I do think that this is kind of a high risk, high reward scenario around here. And Microsoft and Alphabet are going to set the tone after the close today. So again, if they are able to beat those high earnings expectations, expect some more positive momentum for stocks for the balance of this week.

SEANA SMITH: Michael, what are you anticipating? Because obviously, the debate out there on the Street is how much more room a lot of these tech giants, the leaders of 2023, have to run here in 2024. Where are you seeing that investment opportunity?

MICHAEL ARONE: So, from our perspective, we still like the technology sector. We like the fact that earnings momentum continues to be quite strong, price momentum continues to be quite strong. We like the AI phenomenon. We believe that it's real. It will drive productivity gains. It will drive sales gains from that perspective.

So despite the kind of rich valuations, tech has a lot going for it. We still like technology. But to balance that out a little bit, we do like energy companies, and we also like industrials. So from an energy perspective, we think this multi-decade transition from fossil fuels to something else is likely to keep the supply of energy low.

Add in the geopolitical flare ups, the fact that the companies are cheap and generating a lot of cash flow, returning that cash to shareholders is favorable. And then ultimately, industrials are actually growing their profit margins at a time when most are shrinking. We think this is a good sign as well.

BRAD SMITH: OK. Like energy, like industrials, what are the parts of the market that you wouldn't touch with a 10-foot pole right now, Michael?

MICHAEL ARONE: Well, our base case is for a soft landing, and that's what the data suggests we are headed towards in terms of that trajectory, where the economy's moderating, inflation is inching closer to the Fed's 2% target. The consumer and businesses are in reasonably good shape. Sure, they're off their peak levels from at the height of the pandemic when stimulus was at its height, but good shape.

So, with that soft landing scenario kind of being our base case, we're reluctant on getting too defensive. Your staples, your utilities, from that standpoint. Our view is that that's too defensive positioning for a year that's likely to look OK from an economic perspective and from an earnings perspective.