AI Spending Fears Threaten to Swamp Big Tech’s Strong Earnings

(Bloomberg) -- Three of the biggest and most important technology companies in the world are expected to show healthy growth when they report earnings this week.

Normally that would be considered a catalyst to stabilize the wobbly stock market. But for Wall Street, that all depends on two data points: How much money they're spending on artificial intelligence and when it will start to pay off in a meaningful way. And based on the violent market reaction to Meta Platforms Inc.'s rising capital expenditures last week, the response to any disappointment likely won't be forgiving.

Investors have "absolutely no patience right now for higher capex," said John Belton, a portfolio manager at Gabelli Funds. "The stock market can whistle past the graveyard for some time, but eventually it's going to have an impact or at least create a more fragile market."

Investor anxiety is already riding high heading into the week as oil prices soar, with Brent crude trading at its highest level since April. Traders have also piled back into the relative safety of US Treasuries, pushing the 10-year yield back below 5% for the first time in a month. Combined with the ongoing war in Iran and the pivotal US midterm elections next week, it's a challenging macro set up.

In the face of that, tech giants valued at more than $10 trillion are scheduled to report earnings, including major AI spenders like Alphabet Inc., Microsoft Corp. and Amazon.com Inc. All three are expected to post double-digit percentage gains in revenue for the quarter. But investors will be most interested in their comments on how much they plan to spend on AI and the degree to which those investments are proving to be profitable.

"This is a pretty pivotal earnings season," said Kevin Shea, senior equity analyst at BNY Wealth. "The market is discounting megacap growth because the market is becoming less certain that this growth is sustainable."

This skittishness was apparent in the trading of Meta shares after the company reported earnings on Wednesday afternoon. The stock surged in late trading as the results showed encouraging trends. But by the time the market opened on Thursday morning sentiment had reversed as the company's plans to raise its future spending commitments by $125 billion to of $825 billion started to sink in. The stock closed Thursday down 6.1%, its worst day since July, and the price of Meta's five-year credit default swaps jumped to a fresh high as the heavy spending meant it would need to sell more debt.