Several of the Magnificent Seven have released their earnings reports or are due to do so over the coming days. These reports are coming under stringent investor scrutiny in ways that haven’t been seen in recent times. Several factors explain why investors aren’t giving Big Tech a pass as easily as they once did.
The first reason is rising interest rates. AI companies, such as Meta and Amazon, have communicated ambitious plans to build out their AI infrastructure over the coming quarters and years. While such capital expenditure isn’t necessarily a bad thing, investors are concerned that many tech companies are funding their expansion with debt.
As borrowing costs rise, questions abound as to whether such huge expenditure is sustainable, especially given that many of the projects in which these firms are pouring money are yet to become profitable.
This is the reason why Meta shares plunged 7% after the company reported revenue growth that exceeded expectations, but shares slid on concerns about the $600bn the company plans to invest in its AI build-out this year. Investors want such huge capital outlays reduced given the high interest rate environment that the companies are operating within.
The upcoming midterms have also caused many investors to be concerned. Many think Republicans will suffer major losses during the polls and Democrats could take control of both chambers of Congress. Opposition to data centers has grown in many states, and a GOP loss of control in Congress could make it harder for the AI build-out to continue at the same pace since Democrats have been calling for slowing data center construction until it is clearer what impact these facilities are having on key resources like water and electricity.
Developments in China are also making U.S. investors more wary. AI companies in China have seen their lofty valuations unravel after Beijing imposed export controls on tech products and global tech markets became more fragmented. Investors worry that events in China could be early warnings about what could happen in the U.S., and they are therefore watching tech stocks with a sharper eye than they once did.
Magnificent Seven companies like Alphabet Inc. (NASDAQ: GOOGL) (NASDAQ: GOOG) and Amazon.com Inc. are releasing their earnings reports against the backdrop of this increased investor scrutiny. It remains to be seen how their stocks will perform over the coming weeks after they have released their quarterly performance reports. Their spending plans could cloud their stock performance even if they report solid earnings.
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