Tech earnings face the returns test

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Tech stocks regained some poise on Monday as investors returned to chipmakers and other AI-related equities after last week’s heavy losses. The Philadelphia Semiconductor Index rallied 1.6%, and the Nasdaq rose 1.1%, its biggest single-day gain in more than two weeks.

Meta’s earnings, due on Wednesday, will kick off the reporting season for US mega-cap tech companies. Against the backdrop of rising interest rates and higher financing costs, investors will be looking for evidence that AI can drive meaningful monetization while generating returns that justify elevated capital spending and pressure on free cash flow.

Without taking any single company views, we discuss three key areas to watch in the coming weeks that could shape the AI trade into 2027.

The health of core businesses remains the first line of support. The largest US technology companies enter the reporting season with strong positions across advertising, software, devices, and digital commerce. Continued demand in these businesses would help fund their AI investment and cushion earnings while AI revenues develop. The key question is whether recent growth rates can be sustained as comparisons become more demanding and macroeconomic risks persist. Solid core-business execution would give investors greater confidence that the AI investment cycle rests on a broad earnings base.

AI monetization will matter more than adoption alone. Rising engagement with AI products is encouraging, but investors increasingly want evidence that usage can generate meaningful revenue and profit streams. Potential monetization models include subscriptions, consumption-based pricing, advertising, transactions, and increased cloud utilization. Greater clarity on pricing and customer willingness to pay will be important in assessing whether recent adoption can support durable growth. Clearer evidence of commercial demand would also strengthen the case that AI is becoming a revenue driver rather than primarily an investment program.

The spending cycle now needs to demonstrate tangible returns. Even if AI revenue is growing, the scale of infrastructure investment has important implications for margins and free cash flow. Investors will therefore also focus on capacity utilization, pricing power, capital requirements, and the returns generated on AI investment to assess whether these companies can justify elevated spending. Management commentary on the future pace of capex and its financial impact will be important in shaping expectations for 2027 and beyond.

Overall, we expect a strong third-quarter tech earnings season from a fundamental perspective, but elevated expectations may lead to company-specific volatility. We stay constructive on the structural AI opportunity, and see opportunities in hyperscalers as well as high-quality semiconductor and hardware beneficiaries of AI spending. Investors should also consider exposure to defensive areas of tech, while those with concentrated tech positions can use periods of market strength to rebalance across sectors and regions. Heightened volatility may also provide investors opportunities to invest or reposition in technology through structured strategies, whether via capital preservation strategies that seek to limit potential losses or yield-generating structures that seek to sell volatility for income and offer the chance to buy favored tech companies at lower prices than today.