It’s looking like it will be a more sluggish start to the day for US equities in the session ahead. S&P 500 futures are down 0.2% and Nasdaq futures also down 0.2% as we see a more tepid mood ahead of the opening bell later.
Things were looking fine yesterday before some late selling hit to drag major indices lower by the time we got to the close. Naturally, heightened tensions in the Middle East did not help. However, investors were arguably also nervous about big tech earnings and rightfully so.
After the close, we saw Tesla and Alphabet (Google) both report earnings and they were fairly disappointing albeit for different reasons.
While delivering a beat on revenue, Tesla’s profit margins got squeezed hard amid price cuts and also on higher spending on new projects. Hint, they’re AI-related of course.
As for Alphabet, revenue and earnings crushed expectations but it was all about capital expenditure i.e. AI spending once again. The company raised its spending budget for the year to $195 billion to $205 billion while also reporting -$5.9 billion in free cash flow. This marks the first time in its history as a public company that its cash flow dropped into the red for a quarter.
And that is raising plenty of alarm bells on all tech firms as concerns mount over the continued rise in spending on AI.
Sure, Alphabet’s earnings pretty much say that investment in AI does indeed translate to revenue. However, is that revenue going to be big enough to cover the mountain of spending on AI itself? That is the real question now.
We’re perhaps starting to run from the narrative that investors are demanding firms to show me the money, to the narrative that investors are now wanting firms to show me that you can cover back the massive outlay.
If so, that will be a scary proposition with many hyperscalers in particular still needing more time to catch up on the insane amount of capital expenditure spent on chips, hardware, and data centers.
This article was written by Justin Low at investinglive.com.