Microsoft’s $381 billion rout exposes dark side of the AI binge
(Bloomberg) — Wall Street’s apprehension about the cost of developing artificial intelligence technology has been simmering beneath the surface of the stock market for months. Now it’s starting to boil over. Microsoft Corp. (MSFT)reported solid earnings on Wednesday, but investors zeroed in on stagnating growth in its Azure cloud-computing business and the more than $100…
(Bloomberg) — Wall Street’s apprehension about the cost of developing artificial intelligence technology has been simmering beneath the surface of the stock market for months. Now it’s starting to boil over.
Microsoft Corp. (MSFT)reported solid earnings on Wednesday, but investors zeroed in on stagnating growth in its Azure cloud-computing business and the more than $100 billion it’s expected to dole out in capital spending this year. The next day, the stock tumbled 10%, and the selling continued on Friday, wiping out $381 billion in market value in two sessions. When all was said and done, Microsoft posted its worst week since March 2020.
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“In a normal world, these results would be pretty good, but in the backdrop of the scale of spending, with things priced for perfection, you really have to hit your marks,” said Josh Chastant, portfolio manager of public investments at GuideStone Funds, which owns a stake in Microsoft.
That point was made by Meta Platforms Inc. (META), which forecast the fastest quarterly revenue growth in more than four years. Investors responded by sending the stock soaring 10% on Thursday for its best day since July even though the company also said it plans to boost capital expenditures by as much as 87% in 2026. That reality seemed to sink in on Friday as the shares retreated 3% for their worst day since Oct. 30.
The divergence laid bare the increasingly narrow tightrope Big Tech companies are walking three years into a rally built on bets that their deep pockets and aggressive investments will put them at the forefront of the next transformational technology. Investors can stomach massive spending as long as there’s growth to back it up. If not, prepare to be punished.
“We’re firmly in an era where the monetization of AI capex has to be realized for the valuations of tech stocks to be justified,” said Chastant, whose firm manages about $24 billion.
That lesson will be top of mind for market pros this week with big AI spenders Alphabet Inc. (GOOG, GOOGL) and Amazon.com Inc. (AMZN) set to report earnings on Wednesday and Thursday, respectively. Those two companies along with Microsoft and Meta are expected to spend more than $500 billion combined on capital expenses this year, according to data compiled by Bloomberg, with much of it going to AI computing infrastructure.
Expectations are highest for Alphabet, which has been by far the best performing stock among the Magnificent Seven over the past six months with a gain of more than 70%. That rally has been fueled by the success of Google’s Gemini AI model and excitement about its custom-made AI processors, which are expected to help drive cloud-computing growth.
Alphabet shares closed at a record on Thursday before retreating slightly on Friday. At more than 28 times estimated profits, they’re trading at their most expensive level in almost two decades.
Amazon will be under pressure to keep momentum going after Amazon Web Services, the world’s biggest cloud-computing business, posted the strongest expansion in almost three years last quarter.
“Not all the growth rates are going to be hit,” said Peter Corey, co-founder and chief market strategist at Pave Finance, which oversees $20 billion in client assets. “Over the long-term, expectations could really get hammered.”
Many investors are already starting to pull some of their bets on tech. An index tracking the Magnificent Seven, which also includes Apple Inc. (AAPL), Tesla Inc. (TSLA) and Nvidia Corp. (NVDA), is down 1.5% since closing at a record three months ago, while the S&P 500 is up 0.7% in that time. And the declines have been far more severe elsewhere.
For example, Oracle Corp. (ORCL), whose shares soared as much as 97% in 2025 amid excitement about growth in its cloud-computing business, is down 50% since hitting a record in September. The selloff is being driven by skepticism that spending commitments from money losing startups like OpenAI will fully materialize and the cost of adding computing capacity.
“What we’re really afraid of is more than one company spending a lot more in capex and getting a lot less in return,” said Bob Savage, head of markets macro strategy at BNY. “That would be a reason to step back and pause and question the strategy. But right now we don’t have enough information to answer that.”
This kind of bearish sentiment has been building for months. The tech sector was the most under owned among active managers at the end of the third quarter, according to the latest available data compiled by Barclays. This year, discretionary investors have continued to rotate out of megacap and tech names and into cyclical sectors like materials and industrials, Deutsche Bank data showed last week.
“Big Tech is still under duress, the rotation remains in play, and there’s not enough evidence to make people feel comfortable that they’re growing faster than they’re spending,” Savage said.
Hedge funds have been exiting the sector as well. Information technology was the most net sold sector for two straight weeks, according to Goldman Sachs prime brokerage data for the week ended Jan. 23.
Ultimately, the way to reverse theses trends is for companies to show proof that they’re monetizing their AI investments, according to Pave Finance’s Corey.
“It all comes down to how this extraordinary capex has to translate to an extraordinary return,” he said. “Until we get to the promised land, we could get more stumbles.”
