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Thought of the day

Alphabet is scheduled to report second-quarter earnings today after the market closes, marking the start of a closely watched week of results from large-cap tech stocks. This earnings season arrives at a time when investors are increasingly focused on the durability of AI-related capital expenditure, particularly after the semiconductor sector’s strong rally began to lose momentum in recent weeks.

Without taking any single-name views, we believe that clarity—or the lack of it—across three areas will be central to the near-term direction of the AI trade.

How much further can AI capex rise? Capex will be a central focus, with investors looking for greater clarity on both the near-term spending path and how long current investment intensity can last. Recent guidance across hyperscalers points to another sharp rise in AI-related spending, driven by the data center buildout, higher component costs, and expanding compute needs. The key issue is whether these companies would signal when spending growth may begin to moderate or whether capex will continue to move higher into 2027. Management commentary on spending discipline, free cash flows, and returns on investment will therefore be closely scrutinized.

Whether AI can deliver durable revenue growth. Investors will also be watching whether AI demand continues to translate into durable top-line growth across cloud, advertising, search, and software. Key questions include whether cloud demand can stay strong as AI workloads scale, whether AI features are driving incremental usage and monetization, and whether core businesses can maintain momentum. In search and advertising, the focus will be on whether AI improves engagement, targeting, and pricing.

Whether margins can withstand rising costs. A third key question is whether companies can protect margins as depreciation and hardware prices rise. Investors will focus on whether stronger revenue growth, pricing changes, product mix, and cost discipline can offset the growing burden from AI infrastructure investment. This is especially important given the sharp rise in memory and component costs, which has put pressure on gross margins and earnings leverage. Markets will be looking for signs that operating efficiencies, better monetization, and supply-chain management can help preserve profitability even as the cost base grows.

Overall, we remain constructive on AI’s growth story, but we favor a more balanced exposure across the AI value chain—from semiconductors and hardware to megacap tech and more defensive areas of the industry. Investors should also ensure diversification beyond AI as market leadership broadens in the next phase of the rally.