(Bloomberg)– Wall Street’s apprehension about the cost of developing artificial intelligence technology has been brewing beneath the surface of the stock market for months. Now it’s starting to overflow.
Microsoft Corp. reported strong earnings on Wednesday, but investors focused on the stagnant growth of its Azure cloud computing business and the more than $100 billion it is expected to spend in capital spending this year. The next day, the stock fell 10% and the selling continued on Friday, wiping out $381 billion in market value in two sessions. Ultimately, Microsoft recorded its worst week since March 2020.
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“In a normal world, these results would be pretty good, but given the scale of the spending, with prices set for perfection, you really have to hit your targets,” said Josh Chastant, public investment portfolio manager at GuideStone Funds, which owns a stake in Microsoft.
This point was underscored by Meta Platforms Inc., which is forecasting the fastest quarterly revenue growth in more than four years. Investors responded by sending the stock up 10% on Thursday, its best day since July, even though the company also announced plans to increase capital spending to 87% in 2026. That reality seemed to sink in Friday as shares fell 3% for their worst day since Oct. 30.
The divergence exposes the ever-tightening tightrope. Big tech companies have been riding a three-year rally built on a bet that their deep pockets and aggressive investments will put them at the forefront of the next transformational technology. Investors can sustain massive spending as long as there is growth to support it. Otherwise, prepare to be punished.
“We are firmly in an era where monetization of AI investments needs to happen for tech stock valuations to be justified,” said Chastant, whose firm manages about $24 billion.
That lesson will be top of mind for market professionals this week, as big AI spenders Alphabet Inc. and Amazon.com Inc. are expected to report results on Wednesday and Thursday, respectively. These two companies, along with Microsoft and Meta, together are expected to spend more than $500 billion in capital spending this year, according to data compiled by Bloomberg, much of which will be devoted to AI computing infrastructure.
Expectations are highest for Alphabet, which has been by far the best performing stock among the Magnificent Seven over the past six months with a gain of more than 70%. This rally has been fueled by the success of Google’s Gemini AI model and enthusiasm for its bespoke AI processors, which are expected to help drive growth in cloud computing.
Alphabet shares closed at a record high on Thursday before falling slightly on Friday. With estimated earnings more than 28 times higher, they are trading at their highest level in almost two decades.
Amazon will be under pressure to continue its momentum after Amazon Web Services, the world’s largest cloud computing company, posted the biggest expansion in almost three years last quarter.
“Not all growth rates will be impacted,” said Peter Corey, co-founder and chief market strategist at Pave Finance, which oversees $20 billion in client assets. “In the long term, expectations could really be exceeded. »
Many investors are already starting to pull back some of their technology bets. An index tracking the Magnificent Seven, which also includes Apple Inc., Tesla Inc. and Nvidia Corp., is down 1.5% since closing at a record high three months ago, while the S&P 500 is up 0.7% in that period. And the declines were much more severe elsewhere.
For example, Oracle Corp., whose shares have soared as much as 97% in 2025 amid enthusiasm over the growth of its cloud computing business, is down 50% since hitting a record in September. The sell-off is driven by skepticism that losing startups like OpenAI will fully realize spending commitments and the cost of adding compute capacity.
“What we’re really afraid of is more than one company spending a lot more on investments and getting a lot less in return,” said Bob Savage, head of macro markets strategy at BNY. “That would be a reason to step back and question the strategy. But right now we don’t have enough information to answer that question.”
This kind of bearish sentiment has been building for months. The technology sector was the most underowned among active managers at the end of the third quarter, according to the latest available data compiled by Barclays. This year, discretionary investors continued to shift away from mega-caps and technology stocks and toward cyclical sectors like materials and industrials, Deutsche Bank data showed last week.
“Big Tech is still under pressure, turnover remains in play and there isn’t enough evidence for people to feel reassured that they are growing faster than they are spending,” Savage said.
Hedge funds have also left the sector. Information technology was the best-selling sector for two weeks in a row, according to Goldman Sachs prime brokerage data for the week ended January 23.
Ultimately, the way to reverse these trends is for companies to prove that they are monetizing their AI investments, according to Pave Finance’s Corey.
“It’s all about how these extraordinary investments are to translate into an extraordinary return,” he said. “Until we get to the promised land, we may encounter even more failures. »
