Earnings Will Test Whether AI Growth Estimates Are Real
Chip stocks are bouncing Monday morning, but AI valuations built on predicted earnings are being questioned.
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The key issue investors face this week is whether last week’s problems in the technology sector, especially in chips and data centers, will gain further traction. The reaction to earnings reports will determine where things are headed.
After the worst week for the S&P 500 and Nasdaq since June, Nasdaq 100 futures are up about 1% Monday morning. Oil is down about 2% after President Trump waived some Russia sanctions, bonds are stable, and the chips and the Magnificent Seven are bouncing.
Defensive names that held up last week, such as drug stocks and Walmart (WMT), are lower as money moves back into tech. For those worried the Black Monday anniversary would bring a repeat, the market is breathing a sigh of relief.
A bounce after a week like last week isn’t a surprise. The test comes when the big names start reporting, and with no major economic reports on the schedule, earnings will drive the action.
Beats Weren’t Enough Last Quarter
Last quarter, leading tech names didn’t get favorable reactions even when they beat on both the top and bottom lines. Guidance didn’t help much either.
It’s hard to gauge the level of expectations, but the market is clearly skeptical of the growth we are seeing. Taiwan Semiconductor (TSM) reminded us of that last week when it beat estimates, and the stock fell anyway on margin pressure and higher spending plans.
Data Centers Run Into Reality
Part of that skepticism comes from the data center buildout. The Financial Times reports that more than three years into the AI boom, ambitious data center plans are running into reality. At least 47 large projects have been delayed, withdrawn or blocked in 2026, according to RegLayer.
Bernstein analysts estimated that only about 35% of the planned U.S. data center pipeline is credible. Substantial political headwinds also loom, with more than 1,000 communities nationwide considering AI infrastructure restrictions, according to FT research.
Much of the AI growth story is built on that data center pipeline. If only about a third of the planned data centers are likely to get built, a lot of the revenue that chipmakers, equipment suppliers and data center operators are counting on may never show up. That is a bigger problem for the companies that borrowed heavily to build ahead of demand, like the AI cloud providers I wrote about on Friday.
Valuations Depend on Predictions
Many folks are focused on valuations, and many AI stocks look reasonable based on forward earnings. But forward earnings are predictions, and people are now questioning them. A stock that trades at 25 times next year’s expected earnings isn’t cheap if next year’s earnings come in well below the estimate.
That is the issue that will come into play with these earnings reports. A beat this quarter won’t settle much.
The market is trying to figure out whether the growth analysts are projecting for the next few years will actually happen, and what it will cost to get there. With the 10-year Treasury yield still above 5% and competition for capital intensifying, that cost keeps rising.
The Reports to Watch
SpaceX (SPCX) reports Tuesday, and the focus will be on Starlink and its AI operations, with a reported $40 billion capital raise in the background. Meta Platforms (META) and Tesla (TSLA) follow Wednesday.
Meta is the one to watch. Analysts expect earnings of $6.76 a share on revenue of about $63.4 billion, but the number that matters most is spending. Investors want to see whether all the money going into data centers and AI is producing growth that justifies it.
Game Plan
I’m not chasing this bounce in the leaders. If the AI names hold up on earnings and the laggards keep acting well, that would be a healthy sign that the market can stabilize without the gap between the two tiers widening again. If the reports produce more sell-the-news reactions, last week’s selling will gain traction and the rotation out of the leaders will continue. I’ll let the price action tell me.
I’m continuing to add beaten-up names in pieces, particularly in biotech, where I can find logical stop levels, and I’m keeping plenty of dry powder for the opportunities earnings season will produce.
At the time of publication, Rev Shark was long SPCX.
