Olympic athletes weren’t the only ones diving in unison last week; tech stocks put in quite a performance as well. The Nasdaq Composite index was down 10% on Friday from an all-time high just a few weeks ago, Reuters reported. Part of that was investors getting antsy about returns on AI investments—and also, they have this little worry about the economy maybe heading into a recession.
CFO Brew may not be as fun as Snoop Dogg narrating Olympic badminton, but we’ll do our best to break down the results.
Solid form. Despite the sell-off in equities broadly and tech specifically, nearly all the biggest tech companies that reported earnings last week exceeded analyst forecasts. Microsoft’s earnings per share came in higher than expected. Meta, Apple, Amazon? Beat, beat, beat. Same with chipmakers AMD and Qualcomm.
“Just one note…” Don’t get them wrong: Investors still love the promise of AI. They just wish the companies (a) would make money sooner and (b) didn’t have to spend so much to grow their businesses.
Daniel Morgan, senior portfolio manager with Synovus Trust, summed up its investors’ concerns to Bloomberg. As companies spend huge amounts of money to ramp up their AI capabilities, will they “capture enough incremental increase in profit growth from their investments?”
Big tech companies say they can’t meet the demand for AI without data centers and other infrastructure, and that costs money. “We are constrained on AI capacity,” Microsoft CFO Amy Hood told investors. A big reason its cloud platform, Azure, didn’t grow more last quarter, she said, was because it didn’t have enough hardware to expand its AI services. Amazon CFO Brian Olsavsky said on its earnings call that it will increase capital investments in the second half of the year because its cloud platform, Amazon Web Services, “continue[s] to see strong demand in both generative AI and our non-generative AI workloads.”
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Meta also spent more than expected on AI this quarter, but Bloomberg reported that unlike Amazon, Microsoft, and Alphabet, it’s shown that AI is making them more money right now, by “helping it sell more targeted ads.”
Speaking of outliers: Poor old Intel. You might have noticed that it wasn’t on our list of companies that beat Wall Street forecasts, like its competitors AMD and Qualcomm. The company has lagged other chipmakers that have more quickly met demand from customers shifting spending to AI-capable chips.
Oh, yeah, the economy. To paraphrase the vice president, tech stocks exist in the context of all in which they live—and the economy in which they reside is one of increasing uncertainty.
Investors are worried that if the Fed cuts rates in September, as Chair Jerome Powell hinted on Wednesday, it won’t come soon enough to prevent a recession, as more signs of weaker growth keep popping up. Employers added far fewer new jobs than expected in July (114,000 vs. the 185,000 expected by one survey of economists) and unemployment rose to 4.3%, the highest it’s been since October 2021.
At the same time, manufacturing activity keeps shrinking. The Institute for Supply Management’s purchasing managers index for manufacturing fell for the fourth month in a row in July.
“As manufacturing and jobs data are pointing toward recession levels, investors are now questioning whether the Fed is cutting too late,” Billy Leung of Global X Management told Bloomberg, where in-house analyst Mark Cranfield will be watching for the two inflation reports coming before the Fed’s September rate-setting meeting. “More cracks in the jobs market and a couple of cool CPIs will stoke the theme of Powell being behind the curve,” Cranfield said.