Tech Giants’ Results Expose Weak Spots in the AI Spending Boom

The week may have been packed with major headlines from the Federal Reserve’s rate cut to a flood of corporate earnings but one theme clearly dominated Wall Street: artificial intelligence.

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Reports from the biggest U.S. tech companies revealed that the world’s corporate giants are still investing billions in AI infrastructure, fueling investor optimism and keeping the broader market near record highs. Both the S&P 500 Index and Nasdaq 100 posted weekly gains, reinforcing the market’s ongoing enthusiasm for technology-driven growth.

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However, investors also showed signs of becoming more selective. Companies whose heavy AI spending didn’t immediately translate into tangible returns faced swift punishment. Meta Platforms Inc. suffered its steepest single-day stock drop in three years after investors balked at its rising expenses. Microsoft Corp., meanwhile, slid over 4% in just two days when its cloud business growth fell short of expectations.

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“We’re starting to see investors demand more accountability,” said Kevin Gordon, head of macro research and strategy at Charles Schwab & Co. “Eventually, we’ll need to see concrete evidence of returns on these massive investments.”

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In contrast, markets rewarded Amazon.com Inc. and Alphabet Inc., whose AI investments are already yielding visible results. Amazon’s stock surged nearly 10% on Friday as accelerating growth at Amazon Web Services reassured investors, even with rising capital expenditures. Alphabet climbed 2.5% a day earlier, powered by robust demand for its cloud and AI offerings.

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Four Key Takeaways from the Week

1. Revenue Growth Takes Center Stage

Spending big on AI isn’t enough anymore investors now want to see how that spending drives revenue.

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Recent earnings highlighted this divide. Alphabet and Amazon both committed to further AI investments but also showcased how earlier initiatives are paying off. Alphabet reported that revenue from products built on its generative AI models tripled year-over-year, while Google Cloud sales jumped 34% to $15.2 billion, surpassing analyst projections.

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Amazon similarly impressed with strong cloud performance. CEO Andy Jassy shared that new AI projects, such as its shopping chatbot, could add an estimated $10 billion in annual sales.

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Meta, however, lacked a comparable growth engine. Without a cloud business to monetize AI advances, the company struggled to justify its massive spending. Even as CEO Mark Zuckerberg emphasized AI-driven improvements in ad targeting and engagement, investors remained unconvinced.

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“This is the first quarter we’ve seen where increased capex wasn’t automatically rewarded,” noted Allen Bond, portfolio manager at Jensen Investment Management. “The focus has shifted toward returns on invested capital.”

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2. A Green Light for the AI Trade

Despite some caution, the market largely interpreted Big Tech’s spending commitments as a bullish signal for AI. The enthusiasm has spread far beyond software benefiting chipmakers, data center builders, and even industrial companies tied to AI infrastructure.

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Nvidia Corp., whose chips dominate AI computing, was again a standout performer. Its shares jumped nearly 9% this week, cementing its position as the first company to hit a $5 trillion market capitalization.

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The AI wave also lifted others: Seagate Technology Holdings Inc. and Western Digital Corp. rallied on upbeat forecasts, while Super Micro Computer Inc. and Broadcom Inc. each climbed more than 4%. Even Caterpillar Inc. gained 10%, thanks to rising demand for equipment used in data center construction.

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Apple Inc., though a relatively modest spender on AI, still saw its stock rise 2.9% for the week following mixed earnings results.

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3. Earnings Continue to Impress

The latest round of tech earnings offered welcome reassurance to investors concerned about stretched valuations. Big Tech’s profit growth easily topped Wall Street expectations.

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With reports in from six of the “Magnificent Seven” including Tesla Inc. earnings for the group are on track to rise roughly 27%, compared to the 15% gain analysts expected before results season began.

By comparison, S&P 500 earnings overall are trending toward 13% growth, with more than half of companies having reported.

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“Tech estimates had already been revised higher going into earnings, and they’re still beating those elevated forecasts,” said Schwab’s Gordon. “That’s strong validation for the sector and for the broader market.”

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4. All Eyes on Nvidia the Final Test

While this week’s results reinforced optimism around AI, the biggest test for the sector is yet to come. Nvidia, widely regarded as the linchpin of the AI ecosystem, is set to report earnings on Nov. 19.

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Expectations are sky-high, particularly after CEO Jensen Huang delivered an upbeat growth outlook during an event in Washington, D.C., earlier this week. Given the company’s outsized role in powering AI development, any disappointment could send shockwaves across the market.

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For now, though, investors are enjoying the momentum.

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“Earnings were expected to be strong and Big Tech delivered,” said Bob Savage, head of markets macro strategy at BNY. “It’s hard to be bearish on a sector that generates profits this consistently.”

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