Microsoft andMeta earnings put a focus on payoffs from AI spending

"As Wall Street grows increasingly concerned about the ability to generate profits from all this AI spending, the expenses are starting to be seen as potential risks for the high rollers. The fear is starting to show up in the stock prices. Microsoft's shares have slumped 11% since the companies last reported earnings on Oct. 29, while Meta's are down around 10%. The S&P 500 is up 1.3% over that span."

"Every quarter investors are going to be looking to see what the ROI is on that spend, said Jonathan Cofsky, a portfolio manager at Janus Henderson, which has about $480 billion in assets and owns substantial positions in Microsoft and Meta. Any hint that they plan to spend even more than anticipated on developing AI could weigh on the stocks, while simultaneously giving a boost to the companies benefiting from the largesse, like chipmakers Nvidia Corp., Broadcom Inc. and Micron Technology Inc."

"So far, signs are pointing to the heavy spending continuing. Late Tuesday, Seagate Technology Holdings Plc said the outlook for demand for high-capacity hard drives from data center owners looks strong through calendar 2027 and multiple cloud customers are discussing demand growth projections for 2028. Seagate's outlook sent the stock up 10% in premarket trade Wednesday, and lifted peers including Western Digital Corp. and Sandisk Corp."

Microsoft and Meta earnings act as early indicators of returns on AI investment, with Alphabet and Amazon reporting next week. The four firms are expected to have about $505 billion in combined capital expenditures this year, up from roughly $366 billion estimated for 2025. Investors worry about the ability to generate profits from the AI spending, and those concerns have pushed Microsoft and Meta shares lower while the S&P 500 rose. Quarterly ROI will be closely watched; signals of increased AI investment could pressure big tech stocks while benefiting suppliers such as Nvidia, Broadcom and Micron. Seagate expects strong demand for high-capacity data-center drives through 2027 and discussions about 2028 growth, lifting storage peers.

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