Two great 7 stocks beat earnings estimates but didn’t move the market.

Two of the so-called “Magnificent 7” stocks – microsoft (NASDAQ:MSFT) and alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) — reported better-than-expected earnings after the market closed Tuesday afternoon, but neither was able to move the market.

The S&P 500 and Nasdaq Composite both closed slightly lower on Tuesday, with both trading lower in early morning trading. Additionally, both the S&P 500 and Nasdaq composite index fell Wednesday morning.

It may seem unusual that two of the biggest tech stocks that dominated the market last year performed poorly this week after posting solid performances. But other factors are also at play, including Wednesday’s Federal Reserve meeting and subsequent interest rate decisions.

AI drives Microsoft’s profits

Microsoft, now the world’s largest company by market capitalization, had a strong fiscal second quarter that ended December 31. The company’s revenue rose 18% to $62 billion, and net income rose 33% year over year to $21.9 billion, or $2.93 billion. per week. But on Wednesday morning, Microsoft stock was down about 1%, trading at about $403 per share.

The tech giant’s revenue continues to be driven by its cloud computing business, which grew 24% to $33.7 billion in the quarter. Of this amount, the amount created through artificial intelligence-based intelligent cloud business was $25.9 billion, a 20% increase from the previous year and exceeding expectations.

“We have moved from talking about AI to applying AI at scale,” said Satya Nadella, Microsoft Chairman and CEO. “By infusing AI into every layer of the technology stack, we’re helping win new customers and drive new benefits and productivity gains across all sectors.”

Microsoft’s third-quarter outlook may be one reason its stock price fell Wednesday. This is because Microsoft’s third quarter sales are expected to be between $60 billion and $61 billion, down slightly from $62 billion in the second quarter. Both the Intelligent Cloud and Productivity and Business Process businesses are expected to increase revenue quarter-on-quarter, while the Personal Computing segment is expected to decline.

Microsoft also forecast third-quarter operating expenses to be between $15.8 billion and $15.9 billion, up from about $15.3 billion in the second quarter. However, that guidance includes approximately $300 million in costs associated with the integration of its recently purchased Activision.

“We expect to see a significant sequential increase in capital expenditures due to our investments in cloud and AI infrastructure,” Chief Financial Officer Amy Hood added on the earnings call.

Alphabet Increases Cost of Capital

Alphabet, which owns Google and other assets, also beat expectations, but its shares fell about 6% in the morning Wednesday to about $143 per share.

Alphabet, currently the world’s fourth-largest company by market capitalization, recorded sales of $86.3 billion in this quarter, a 13% increase compared to the same period last year. Operating profit margin increased from 24% to 27% compared to the fourth quarter of 2022, and net profit increased 52% to $20.7 billion.

Revenue from Alphabet’s cloud computing business rose 26% year over year to $9.2 billion, while Google Advertising, which includes Google Search and YouTube ads, rose 11% to $65.5 billion. However, Google advertising numbers were slightly lower than expected.

“We are pleased with the continued strength of Search and the growing contribution from YouTube and the Cloud. Each of these is already benefiting from AI investments and innovation. As we enter the Gemini era, the best is yet to come,” Alphabet CEO Sundar Pichai said in an earnings call.

Gemini is Alphabet’s recently launched AI-based search model, built to compete with OpenAI’s ChatGPT. As the company explains in its 10-K filing, a significant capital investment will be made.

“For the years ended December 31, 2022 and 2023, we spent $31.5 billion and $32.3 billion on capital expenditures, respectively,” Alphabet said in the filing. “We expect to increase our investments in technology infrastructure, including servers, network equipment and data centers, beyond 2023 to support business growth and long-term initiatives, particularly in support of AI products and services. .”

This may have also affected investor sentiment towards Alphabet. But looking at the reactions from Wall Street analysts, it was a mixed bag with roughly half raising their price targets and half lowering them.

So the bottom line is that none of these Magnificent 7 stocks were able to move the market despite a solid quarter, but investors may be somewhat preoccupied with what the Fed will do on Wednesday.