U.S. investors are increasingly scrutinizing the costs behind the artificial intelligence boom, as this week's earnings reports from tech giants reveal a sharp focus on capital expenditures. Meta Platforms saw its shares tumble nearly 10% on Thursday, while Microsoft slid more than 3%, even as both companies delivered better-than-expected quarterly results. In contrast, Alphabet gained almost 6% after Google Cloud posted its strongest growth quarter on record, highlighting a growing divergence among AI leaders.
The Cost of AI Infrastructure
The central theme emerging from this earnings season is the massive spending required to build and maintain AI infrastructure. Meta raised its 2026 capital expenditure forecast to a range of $125 billion to $145 billion, up from its previous $115 billion to $135 billion outlook. The company is also considering a $20 billion to $25 billion investment-grade bond sale to fund its AI buildout, according to Reuters. S&P Global left Meta's credit rating unchanged but noted that the aggressive spending is beginning to weigh on its credit metrics.
Microsoft projected 2026 capital spending of $190 billion, exceeding analyst estimates. While Azure revenue grew 40% in the latest quarter, it still trailed Google Cloud's 63% jump. CFO Amy Hood expressed confidence in the returns on these investments, but the market remained skeptical, sending Microsoft shares lower.
Investor Skepticism Grows
The market's reaction suggests that solid earnings are no longer enough to satisfy investors. Alphabet received a boost from Google Cloud's record growth, but Amazon's AWS, which posted a 28% sales increase to $37.6 billion, also benefited from AI demand. Yet Meta's revenue beat failed to impress, with analysts pointing to the company's rising capex as a key concern.
"Meta's numbers failed to impress investors," said Gil Luria, managing director at D.A. Davidson, especially given Google's stronger quarter. Joe Maginot, large-cap portfolio manager at Madison Investments, summed up the sentiment: "The market wants to know, what's the return on Meta's capex?"
Market Positioning Shifts
Options markets had anticipated significant moves for Amazon, Microsoft, Alphabet, and Meta ahead of earnings, with expected one-day swings ranging from 4% to 7.1%. The AI trade had been highly profitable, with Bespoke Investment Group's 50-stock AI basket surging 27.2% between March 30 and Monday. The Philadelphia semiconductor index rose roughly 40% year-to-date and more than doubled over the past twelve months.
However, positioning flipped on Tuesday, with the Nasdaq falling 0.90% and the S&P 500 sliding 0.49%. AI-related jitters hit chipmakers hard: Nvidia, AMD, and Broadcom all closed lower, dropping between 1.6% and 4.4%. "Take a few chips off the table," advised Chuck Carlson, CEO of Horizon Investment Services, citing the earnings slate as a catalyst for profit-taking.
Valuation Risks and Macro Headwinds
Valuation risk is also lurking beneath the surface. According to Goldman Sachs, "terminal value"—the portion of equity value tied to earnings beyond the next decade—now accounts for roughly 75% of the S&P 500's total equity value, a level not seen in 25 years. The bank estimates that a single percentage point reduction in expected long-term growth could wipe about 15% off the S&P 500's enterprise value, with high-growth stocks bearing the brunt.
The macro backdrop offers little comfort for AI bulls. U.S. inflation accelerated in March, with rising gasoline prices amid the Iran war fueling bets that the Federal Reserve may leave interest rates unchanged well into next year. This is a headwind for growth stocks, whose valuations depend heavily on future profits.
Demand Remains Strong
Despite the cautious tone, demand for AI technology has not disappeared. Alphabet now credits enterprise AI as the primary growth driver for Google Cloud for the first time. Amazon reported its fastest AWS growth rate in 15 quarters. In China, demand is so robust that Nvidia's B300 server prices have surged to nearly $1 million each, according to Reuters. These data points hardly suggest a cycle in retreat.
The AI stock rally is not over, but the game has become more challenging. Investors are sticking with the AI theme but are increasingly selective, favoring companies that can demonstrate real revenue today over those still pitching a long runway and patience from the market.
