Two Key Themes to Watch in Q1 Tech Earnings

Key Takeaways

• Tech companies show no signs of slowing earnings momentum, despite sector returns continuing to slide, Morningstar analysts say.
• Software stock balance sheets remain intact, even with historic levels of capital expenditure.
• Hardware firms tied to the AI infrastructure boom are likely to see continued earnings and share growth over the next year and beyond.

As big tech companies report first-quarter earnings, for some stocks, the focus will be on how much they’ll continue to profit from the artificial intelligence boom. For others, the question will be the degree to which AI will upend their business models. Morningstar analysts will be watching for two key themes: software stocks’ ability to keep their fundamentals intact, and whether the AI data center buildout proceeds according to plan.

Highlighted Tech Stock Earnings Release Dates

• Thursday, April 23 (after close): Intel INTC
• Wednesday, April 29 (after close): Microsoft MSFT, Amazon AMZN, Amphenol APH
• Tuesday, May 5 (after close): Arista Networks ANET, Advanced Micro Devices AMD
• Wednesday, May 20 (after close): Nvidia NVDA

The upcoming round of earnings reports arrives on the heels of a tumultuous first quarter for tech. These stocks fell 9.0% as a group in the first three months of the year as measured by the Morningstar US Technology Index, while the overall Morningstar US Market Index fell just 4.2%. At the industry level, software stocks suffered most, while semiconductor stocks stayed relatively afloat. The Morningstar US Software Application Index and the Morningstar US Software Infrastructure Index each lost over 20% in the first quarter, while the Morningstar US Semiconductor Index lost just 4.8%.

And in April, tech stocks of all kinds have been on an upswing. The US Semiconductors Index has gained 25.2% this month through April 22. Software infrastructure stocks rose 15.9% during the same period, ahead of the US Market Index’s 9.4%. Software application stocks are still behind with a gain of 4.2%.

Will Software Stocks’ Balance Sheets Stay in Good Shape?

During the first quarter, investors grew nervous that advances in AI would eat into the customer bases of existing software stocks and even render their entire business models obsolete. Software stocks of all kinds, including industry leaders Microsoft and ServiceNow NOW, took double-digit losses.

So far, Morningstar analysts say these disruptions aren’t apparent in the balance sheets of high-quality software names. “I don’t expect an AI-related disruption in fundamentals for software companies in the first-quarter earnings cycle,” says Morningstar senior analyst Dan Romanoff, who covers software giants like Microsoft and Amazon. “Generally, I’m expecting modest upside on the top and bottom lines for the companies I cover.”

Romanoff says fundamentals have been fine recently for software companies, and it’s harder than it seems for the balance sheets of established companies to change quickly. “We would first see some signs of deterioration, which has not occurred.” He thinks large, proven software companies are fine where they’re at. “Bigger picture, I think uncertainty around what the long-term looks like is high right now. Investor fears around software are high. But I am less fearful than the market seems to be,” he says.

Further out, the picture is less clear because of the fast pace of dynamic changes in AI and software. “The question of AI’s impact on software is inherently a long-term unknowable,” Romanoff says. “Right now, the fear is that software as we know it will disappear. But for now, software stock fundamentals are fine.”

Big tech has recently poured trillions into AI infrastructure—an unprecedented level of spending that could result in overinvestment, excess competition, and poor stock returns. It’s important to watch the bottom lines of the companies involved. Romanoff says he wouldn’t be surprised if first-quarter earnings reports showed capital expenditures crept up again for both Microsoft and Amazon, but he isn’t concerned: “Both companies will likely say that they are still adding data center capacity as fast as they can, and that utilization is 100% on the day any new capacity is added.”

For Semiconductor and Hardware Stocks, Watch How the AI Buildout Progresses

Well-positioned AI vendors can continue to benefit from the AI boom, says Morningstar senior analyst William Kerwin, who points to Broadcom AVGO, Arista, Amphenol, and Marvell Technology MRVL. “We expect continued strong growth for AI infrastructure investments to benefit companies across semiconductors, networking, chip equipment, and other tech hardware,” he says. “This should drive strong first-quarter earnings results.”

Kerwin says supply remains “immensely constrained,” and that “We see budding monetization enabling continued spending growth.” He believes the primary remaining question is the durability of AI infrastructure spending growth at software giants, but that goes beyond the first quarter. “We believe there is high visibility into strong spending through 2027,” he says, but 2028 and beyond is less certain.

“We want to ensure that the AI buildout remains on track, given the massive capex plans announced by large cloud companies a quarter ago,” says Morningstar senior analyst Brian Colello, who covers semiconductor giants Nvidia and Intel. “We’re hearing more and more about a shortage in server CPUs used in agentic AI,” he says. “We would like to understand Intel and AMD’s pricing and volumes for these products.”

Colello adds that high memory prices will likely reduce the production of low-end PCs and smartphones, “which should weigh on processor revenue in those end markets.” He thinks Qualcomm QCOM could be especially affected by this, and that Intel and AMD could see some of their expected server processor growth offset by lost processor revenue in PC and smartphones. “Finally, AI and industrial end markets should support growth across broad-based chipmakers like Texas Instruments TXN. Automotive chip demand should be recovering, but the magnitude and timing of the recovery are still a bit uncertain, so we hope to learn more here,” he says.