Head of FX Strategy
As five of the "Magnificent 7" tech giants—Apple, Alphabet, Amazon, Meta, and Microsoft—report earnings this week, investors will be keenly watching their updates on core businesses such as advertising and cloud services, and more importantly, spending on artificial intelligence (AI) and its tangible returns. These companies, with a combined market cap of $12 trillion, have driven market gains this year, making their results pivotal for the ongoing equity rally.
However, since peaking on July 10, the gap between Big Tech and the rest of the market has been narrowing amid closer scrutiny on the efficacy of their AI spend. Microsoft, Alphabet, Amazon, and Meta collectively ramped up their capital expenditures in Q3, pouring $56 billion—a 52% year-over-year increase—into areas like AI. While the transformative potential of AI is widely acknowledged, investors are now questioning the timing and scale of returns from these hefty investments. This earnings season could serve as a critical test for these megacap leaders, many of whom (except Apple and Meta) have yet to reclaim their July highs, even as they trade at valuations above historical norms and the broader market.
Microsoft: Azure Growth Meets Costly AI Expansion
Apple: Limited AI Exposure but Service Revenue in Focus
Amazon: Short-Term AI Costs Clash With Long-Term Potential
Sustained capital expenditures (capex) on AI by tech giants like Alphabet, Amazon, Microsoft, and Meta is a double-edged sword: while it could accelerate their growth and maintain competitive advantages in AI, it also puts pressure on profitability, especially as investors start questioning the return on these massive investments.
For Nvidia, however, this continued spending is an unequivocal positive, as it translates directly into demand for its advanced GPUs, which are critical for powering AI workloads. As long as Big Tech remains committed to advancing their AI infrastructure, Nvidia stands to benefit as the go-to supplier, securing its growth trajectory even if some tech giants face profitability pressures.
While sustained capex spending by Big Tech is undoubtedly a growth driver for Nvidia, there are potential risks that could temper this upside. Supply constraints, especially around Nvidia's upcoming Blackwell chips, could limit its ability to meet soaring demand from AI-driven projects. Additionally, competition in the AI hardware space is intensifying, with companies like AMD and Google developing their own AI chips, which could eventually impact Nvidia's market share. Finally, if regulatory scrutiny on AI or tech spending tightens, this could dampen Big Tech's capex budgets, indirectly affecting Nvidia’s sales outlook. Despite these risks, Nvidia remains well-positioned as a key beneficiary of the current AI boom. Note that Nvidia doesn’t report earnings until November 20.
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