The five major players in the artificial intelligence sector, commonly referred to as hyperscalers, have reported unprecedented capital expenditures, totaling approximately $414 billion last year, marking a significant increase of 70% compared to the previous year. Projections indicate that their spending could surge again, this time approaching $700 billion in the current year. Yet, the critical question remains: will this substantial investment yield greater profitability? This largely depends on customer adoption of AI software and services.
Investors will gain important insights into this dynamic today, as four of these hyperscalers—Alphabet, Amazon, Meta Platforms, and Microsoft—are set to announce their quarterly financial results. Given that these companies collectively represent about 18% of the S&P 500, their performance is expected to have a considerable impact on the benchmark index. Positive earnings reports could propel the S&P 500 higher, while disappointing results might lead to a downturn.
As the market awaits earnings reports, here’s what analysts anticipate from each company:
Alphabet is projected to experience a 19% revenue increase, reaching $117.2 billion, although its GAAP earnings are expected to decline by 7% to $2.62 per share. Investors will scrutinize its core advertising business as an economic indicator, while also monitoring the growth in Google Cloud services, aided by solid demand for its Gemini AI models and tensor processing units (TPUs).
Amazon is expected to report a revenue rise of 21%, amounting to $188.9 billion, with GAAP earnings up by 3% to $1.65 per share. Investors are anticipating evidence of margin expansion within its e-commerce arm, driven by investments in AI and robotics, alongside a continuation of strong cloud computing revenue growth, which reached a notable 24% in the last quarter.
Meta Platforms is forecasted to see a 31% increase in sales, reaching $55.5 billion, and a 5% rise in GAAP earnings to $6.74 per share. The company’s AI investments have so far resulted in heightened engagement across its platforms, drawing in advertisers. Of particular interest to investors will be the ongoing performance of Meta’s latest AI model, Muse Spark, and its potential financial impact.
Microsoft is projected to see a 16% revenue increase to $81.3 billion, with non-GAAP earnings expected to rise by 17% to $4.06 per share. Investors will be keen to find out how well Microsoft is monetizing its Copilot 365 service, especially in light of competition from other AI tool developers such as Anthropic and OpenAI. Additionally, a revival in the sales growth of its Azure cloud computing division is also on investors’ radar.
Overall, Wall Street anticipates relatively modest earnings growth from these major companies. This expectation is influenced by the understanding that significant investments in AI infrastructure may compress profit margins in the short term. Investors are seeking reassurance that these expenditures will ultimately translate into improved profitability. A failure to address these concerns could lead to a sharp decline in the S&P 500 upon the release of their earnings.
In addition to the earnings reports, the Federal Reserve will unveil its interest rate decision later today. The likelihood of a rate cut remains low, particularly due to renewed inflation pressures linked to the ongoing Iran conflict. Investors will be closely attentive to Chair Jerome Powell’s comments regarding the economy during his press conference, seeking cues about the future path of interest rates. With the S&P 500 hovering near record highs, any signals pointing towards a future rate increase, rather than a cut, could trigger a significant market correction.
