By Lewis Krauskopf
NEW YORK, April 29 (Reuters) – A pivotal moment for the artificial intelligence trade driving the U.S. stock market to all-time highs arrives on Wednesday with quarterly reports from four massive companies at the heart of the investment boom behind the new technology.
Results are due after the market closes from Microsoft, Alphabet, Amazon and Meta Platforms — four “hyperscalers” expected to spend over $600 billion this year on data centers and other AI-related infrastructure. Those heavyweight companies represent more than $10 trillion in market capitalization and 17% of the S&P 500’s weighting, while their recent gains have helped lead the market’s rebound over the past month as stocks have shaken off concerns over the U.S.-Israeli war with Iran.
“From a market perspective, they still are the straw that stirs the drinks on big index funds,” said Chuck Carlson, chief executive officer at Horizon Investment Services. “And from an AI perspective, their spending is what is driving the profits for an awful lot of companies.”
The four companies are among the “Magnificent Seven” megacaps that have been central to the doubling of the S&P 500 since the latest bull market for the benchmark index began in October 2022.
Shares of the hyperscalers have jumped since the S&P 500 hit its low for the year on March 30. But in recent months, the stocks have also come under pressure as investors question whether the companies’ capital spending will reap sufficient returns to justify the huge outlays.
Capital spending among the four companies plus Oracle is expected to rise from 50% of operating cash flow in 2024 to nearly 90% by 2027, according to analysts at Barclays. The ability for the companies to show the investments are paying off will be a focal point for Wall Street on Wednesday, as they scrutinize growth in areas such as cloud computing and advertising.
“I don’t know how much latitude investors will give these companies to prove they can convert their investments to cash,” said Noah Weisberger, chief U.S. equity strategist at BCA Research. “I would hope it’s more than a quarter or two, but I doubt it’s more than a year. So somewhere in the next couple of quarters, we’re going to have to see not just capex spending, but that turning into revenue growth as well.”
That the four companies are reporting results nearly simultaneously could make for a particularly vital and volatile moment for the AI trade.
“We will get the overall picture from all of them right away so we know directionally how the industry is headed,” said Kevin Shea, senior equity analyst at BNY Wealth. “But there could be greater volatility because we’ll have up-to-date comparisons on everyone to see who might be winning at a broader level.”
