Tech earnings face a market test
CIO Daily Updates
From the studio
From the studio
Thought of the day
Thought of the day
The US earnings season ramps up sharply on Wednesday, with four of the Magnificent 7 names due to report first-quarter results. Megacap tech earnings arrive at an important moment for global markets: The S&P 500 and Nasdaq have both hit new record highs this week, extending a sharp rebound from their end-March lows. The Philadelphia Semiconductor Index is up more than 30% this month, despite a 3.6% drop overnight on reports of growth headwinds at OpenAI.
The fundamental backdrop remains supportive overall, in our view. Around 40% of the S&P 500’s market capitalization reports this week, with the number of sales and earnings beats both above historical averages so far. Early tech results have also reinforced expectations for sustained AI demand, with enterprise storage demand holding up, large cloud and AI spending commitments staying elevated, and semiconductor manufacturing equipment sales and chip exports both showing strength. Equity investors, meanwhile, have been willing to look through Iran-linked uncertainty and still elevated crude oil prices.
While we do think the tech rally has more room to run, we view this earnings season as a key litmus test for AI investors on the fundamentals across three key areas:
Core businesses still need to deliver. Large cloud and platform companies still rely heavily on operating cash flow from advertising, cloud services, enterprise software, and devices to fund AI infrastructure investment. That means the first test this earnings season is whether the core business remains strong enough to support elevated spending without weakening the broader profit story. So far, guidance has been more resilient than many feared, and there is little evidence that geopolitical developments have materially hurt earnings revisions. But investors will still want proof that the main engines of growth remain healthy even if higher energy prices and macro uncertainty create some short-term caution.
Capex discipline matters more now. Our base case remains that the biggest AI spenders will keep broadly stable full-year capex guidance after lifting investment sharply in prior quarters. But the market is no longer rewarding the AI spending race on its own. Investors increasingly want evidence that new spending is going toward real bottlenecks in compute, power, packaging, and data center capacity, rather than simply extending the buildout. After the recent rally, the bar for capex credibility has moved higher, so management commentary on supply constraints, utilization, and prioritization will matter more than before.
Returns on capital need to come through. We still expect companies to highlight rising adoption, improving monetization, and a growing addressable market. That said, after the sharp recovery in tech multiples, we want harder proof points—whether in the form of better pricing, strong cloud growth, rising engagement levels, improvements in code generation, or other abilities—and new commercial deployments or use cases.
So we continue to position for upside in the broader AI opportunity, while also counseling investors to ensure diversification across the theme. We favor a balanced approach to AI across the enabling, intelligence, and application layers, including semiconductors and chip-making equipment, power and resources, infrastructure, and selected companies in the US, Asia, and Europe that we believe stand to benefit from AI adoption. We would also consider using periods of strength in large-cap tech to rebalance away from concentrated exposure and toward a wider set of AI beneficiaries.