The stock market is an expectations game. But when they keep rising, the goalposts can move so far that even powerful tech earnings can trigger a sell-off.
This is a key risk to consider as we head into another earnings season, where AI spending and returns on investment will be top of mind and a key takeaway will be how much further companies have to extend their beats to even move the needle.
After two quarters of big, positive surprises — and index gains to show for it — healthy earnings beats have become the status quo, according to Bank of America strategist Savita Subramanian, in a note on Monday. What investors are really looking for is whether the growth can be sustained in 2027.
“Ultimately, index [earnings per share] remains highly dependent on the durability of the AI capex cycle and successful monetization,” she wrote.
That’s a theme investors have seen before.
No doubt, Big Tech management will spend their energy and earnings calls emphasizing how their massive build-out spending is tied to insatiable demand. Analysts expect sustained strength in AI-related investment. As Bank of America notes, the top five hyperscalers are on pace to grow capex by more than 110% year over year in Q3.
But as we’ve seen in mixed results among names like Meta (META), Google (GOOG), Amazon (AMZN), and Microsoft (MSFT), a lot will depend on executives convincing analysts and investors that monetization is already being realized or is just around the corner. Spending, and the willingness to risk it, isn’t in itself enough of a positive signal for Wall Street.
As Subramanian wrote, Q3 beats are expected, but further upside likely depends on confidence that strong growth can extend into 2027.
This season is especially challenging because while the AI spending impulse is in play, the economic environment is changing around it. Rates are higher and are expected to rise again, coupled with significant commodity pressure. Next year, there’s more room for things to go wrong. (Not to mention the political uncertainty heading into the November elections.)
“The interplay between geopolitics, rates and Tech may be underestimated — a higher cost of capital and geopolitical bottlenecks could gum up what has so far been a mostly smooth story,” Subramanian wrote.
Much will depend on the ability of Big Tech companies to pull off what might be described as an immaculate quarter. They’ve done it before. Exceptional beats have become all too common. But the bar keeps rising along the external risks that aren’t strictly within their control. This time it’s not just hitting the marks on spending and the revenue projections, but communicating with confidence that the astounding growth will continue.
Hamza Shaban is a reporter for Yahoo Finance covering markets and the economy. Follow Hamza on X @hshaban.
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Source: finance.yahoo.com
