Market test ahead: Upcoming earnings reports from major US tech and growth companies could serve as an important moment for the stock market, which has been facing challenges amid diminishing hopes for interest rate cuts. Tesla, Meta Platforms, Alphabet, and Microsoft are amongst the key players set to announce their earnings next week. These companies, once known as the "Magnificent Seven," played a notable role in driving the S&P 500's 24 per cent growth last year.

Their performance is closely watched as they dominate their respective industries and carry substantial weight in major indices like the S&P 500. Despite a broader rally in the market this year, these mega-cap stocks remain popular amongst investors, leading them to be labelled as the market's "most crowded" trade.

Sentiment shift analysis

The upcoming earnings releases are particularly crucial as the S&P 500 has experienced a recent downturn, erasing much of its year-to-date gains amid concerns about stubborn inflation and the Fed's reluctance to cut rates. Moreover, with stock prices elevated and Treasury yields on the rise, disappointing earnings could dampen investor sentiment and lead to further selling pressure.

Investors are also keeping a close eye on inflation data ahead of the Fed's upcoming meeting. Expectations for rate cuts have significantly decreased since the beginning of the year, reflecting a shift in market sentiment towards a less accommodative monetary policy.

Mega-cap stock trends

The performance of mega-cap stocks has varied in 2024, with Tesla witnessing a sharp decline of about 40 per cent, while Meta Platforms, Alphabet, and Microsoft have posted gains of over 40 per cent, 12 per cent, and 7.5 per cent respectively. However, there remains optimism surrounding their earnings potential, with expectations of robust growth in the first quarter, including a collective earnings growth estimate of 42.1 per cent for six of the seven mega-cap companies.

These companies hold significant importance for the market, as evidenced by their impact on S&P 500 earnings. Beyond the mega-caps, hundreds of other S&P 500 companies are also set to report earnings over the next two weeks, adding further pressure to deliver positive results to support overall market valuations.

In an environment of uncertainty surrounding Fed policy and geopolitical tensions, investors are looking for reassurance from companies about future growth prospects. Any indication of weakness in earnings or outlooks could weigh heavily on stock prices, contributing to further market volatility.

(With Reuters Inputs)