00:00 Speaker A
It feels like earnings are really the thing. Um, that continues to
00:03 Speaker B
And AI spending.
00:04 Speaker A
AI spending. Well, you know, they’re two things connected.
00:06 Speaker B
busiest week of the quarter.
00:07 Speaker A
busiest week of the quarter and we will hear from more of the hyperscalers and find out exactly how much they’re spending. But last week, you know, it kind of hammered home that like spending is good until it’s not.
00:16 Speaker B
Mhm.
00:16 Speaker A
Right? Last year, these companies kept coming out with ever bigger numbers. The stocks for the most part rallied. This year, the market’s like, okay, maybe maybe these numbers are getting a little queasy as we get higher and higher.
00:30 Speaker B
a little toppy.
00:31 Speaker A
A little toppy, even though you had Alphabet come out with 82% growth in its cloud business.
00:35 Speaker B
They’re having 82% growth in their cloud business because they are spending money on AI. It’s worth the investment. It was 26% growth last quarter. This quarter, I mean it’s shocking. Uh with about a third of the companies having reported to date and there’ll be more by the end of the week. But with a third having reported to date, growth is 43%.
00:58 Speaker B
I don’t even recall the last time I saw 43% earnings growth year over year. Um so you average those two course, it’s not going to stay there. It’s not going to stay at 43, but let’s say it goes down to 30, fine. Last quarter, 25, 26, this quarter 30. That is super strong. Not only do we have double digit growth, we have record profit margins. Never in the history of the S&P 500 have profit margins been 13.5% before. And I think, it’s hard to quantify this.
01:25 Speaker A
I know we’ve had we’ve debated this.
01:26 Speaker B
But I think that’s the early return on AI because you ask yourself what has changed. AI is here. I mean, tariffs, they should be hurting profitability and they didn’t. Um, uh CapEx spending in theory should be hurting profitability and it hasn’t. So,
01:46 Speaker A
But CapEx, CapEx is not really CapEx doesn’t really float through to margins, right? And
01:52 Speaker B
Oh, but it does. After tax profit margins, that’s the very bottom of the line. Subtract all your costs and finally there’s your margin.
01:59 Speaker A
Well, and as you know, as I’ve argued, it has as much to do with pricing power at some of the companies as it does about efficiencies. I think efficiencies are just happening at the margin. That said,
02:11 Speaker A
I do think that there will be more efficiencies unlocked as we go on and that is where a lot of the the earnings power is going to come from. Um, we were talking a lot this morning about a note out from Mike uh Mike Wilson over at Morgan Stanley.
02:26 Speaker A
And his thesis is that um the AI benefits will accrue more to those who are adopters rather than sellers, which I thought was interesting.
02:38 Speaker B
Use cases.
02:39 Speaker A
And then if you and Bloomberg came up with a I guess there’s a Bank of America basket of AI adopters. You look at that versus a UBS index of Hyperscalers and then look at it versus the Magnificent Seven, uh and indeed, the the AI adopters are outperforming, which is interesting.
03:00 Speaker C
Yeah, just to give the number, Mike Wilson seeing 100 basis points of net margin expansion through 2027 for companies that where AI is central to the investment case.
