It’s funny that chip stocks are more volatile than oil these days, even with escalating geopolitical tensions rattling the energy supply outlook from the Middle East and Russia, creating enormous uncertainty about any near-term resolution to the conflicts, fueling inflation expectations, encouraging investors to pile into the short end of the yield curve and pushing longer-term borrowing costs higher.

Alas, mood among chipmakers determine the market’s direction more than any of those macroeconomic developments. When chips perform well, the major equity indices tend to perform well too. Since yesterday, sentiment toward chipmakers has improved after several headlines encouraged investors to buy the dip.

Overall, it has been a good opportunity for investors to buy the dip across chipmakers. But it is impossible to say that the recent correction is over. I suspect the upcoming earnings reports and spending updates could tilt the market one way or the other.

If Big Tech stands behind its spending plans, dip-buying could continue. But if Big Tech—which is funneling its free cash flow into chipmakers' pockets while facing rising borrowing costs driven by higher interest-rate expectations and Middle East tensions, and which has yet to demonstrate that these investments are generating sufficient returns—shows signs of slowing the pace of spending, another wave of selling could hit the semiconductor sector.

The good news is that we won’t have to wait long to find out. Already today, after the closing bell, Alphabet and Tesla will step into the earnings confessional. Alphabet has already pledged to spend $180–190 billion on capital expenditures this year—nearly double last year's level. Microsoft and Amazon plan to spend a similar amount, Meta has pledged $125–145 billion, Tesla around $25 billion, while Apple is expected to spend roughly $14 billion.

Some analysts believe total Big Tech capital expenditures could reach $800 billion to $1 trillion this year. If that proves correct, investors will expect these companies to reaffirm or even raise those spending plans over the coming hours, days and weeks.

But the latest reports suggest Tesla, despite setting aside a $25 billion capital expenditure budget, has spent only around $2.5 billion so far this year—and we are already more than halfway through the year. That raises questions about potential underspending on AI, autonomous driving and humanoid robots—the very ambitions that continue to underpin Tesla’s valuation, given that its automotive business remains under pressure from Elon Musk’s political controversies and intensifying competition from Chinese EV makers.

On the earnings front, the S&P 500's technology sector is expected to report the second-highest year-over-year earnings growth rate, at 63.4%, thanks to that AI spending. But the Magnificent Seven are no longer the dominant contributors to that growth, nor to the nearly 25% earnings growth expected for the S&P 500 as a whole in the second quarter. Their combined earnings are expected to grow by around 31%—roughly half the pace recorded in the first quarter, when Magnificent Seven earnings surged 63.2%, the strongest growth since Q2 2021 (+89%).

You see the problem? Earnings growth may be slowing just as these companies are relying more heavily on debt to finance spending. At the same time, higher interest-rate expectations are pushing borrowing costs even higher. It will therefore be fascinating to see how the Magnificent Seven navigate this AI spending spiral.

Again, any pullback in spending expectations could have dramatic consequences for the companies contributing most to earnings growth. In the second quarter, Micron and Nvidia will probably occupy the top two spots.

Yesterday I wrote, "damned if you spend, damned if you don't." I repeat that today. Softer spending plans may help Big Tech stocks recover their latest lag—provided earnings remain resilient—but they would almost certainly hammer the AI supply chain, which has significantly outperformed over the past 8–12 months.

According to FactSet, excluding Micron and Nvidia would reduce the S&P 500's blended earnings growth estimate for Q2 from 24.7% to 16.8%. Suddenly, the picture looks much less sexy.

Zooming out, the top five contributors to S&P 500 earnings growth in Q2 also include Exxon Mobil and Chevron, thanks to higher oil and gas prices, and Broadcom, another major AI beneficiary. Looking even more broadly, roughly 90% of the companies that have reported earnings so far—including the major US big banks—have beaten expectations.

So, all eyes are on Alphabet and Tesla today. By tomorrow morning, following the first major Big Tech earnings reports, we should have a clearer sense of whether the tech heavy US indices deserve to move higher on the back of solid earnings growth, and despite the geopolitical headwinds of higher operating costs, rising borrowing costs and a weaker growth outlook.