The Market Has Changed Its AI Test
Four hyperscalers combined will spend $725 billion this year, but some are achieving better returns. The single AI trade era is over.
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The market enjoyed a powerful bounce on Thursday, triggered in part by a washout in the technology sector driven by the forced selling of leading technology names by the hedge fund Situational Awareness. In addition, Microsoft (MSFT) jumped 16% on earnings and gained $450 billion in market capitalization in a single day, the largest ever for a U.S. business. These two events triggered pockets of strong action, offsetting mediocre breadth and Meta Platforms’ (META) disappointing earnings report.
Positive action is continuing Friday after strong action in Korea. The most interesting news is another split in the Mag 7 with Amazon (AMZN) up sharply on news while Apple (AAPL) is down.
The Test Has Changed
The market is no longer as focused on spending levels. It is focused on whether that spending works and is producing a payoff.
Microsoft guided its capital spending higher for next year and the stock rose 16%. Two weeks ago, Alphabet (GOOGL) raised its capex guidance and entered a bear market. The difference is that Microsoft could point to Azure growth accelerating to 43%, the fastest in four years. The market is not against spending. It is against spending that isn’t clearly showing results.
Amazon is being rewarded Friday morning for the same reason, with its cloud business accelerating for the fifth straight quarter. Meta had no such proof and its free cash flow fell 91% from a year ago.
Apple is a different case and it may be the most instructive situation. Apple beat on earnings, revenue, and iPhone sales. The guidance disappointed, and the reason the company gave was supply constraints from the memory price surge and chip shortages. Apple is the one mega-cap that stayed out of the AI spending race, and it is now being hurt by the input costs that race created. There is no hiding place from AI, even for a company that refused to join it.
AI Is Not a Single Trade Anymore
This is further proof of what I have been discussing, which is that the AI sector is no longer a single monolith. For two years you could buy almost anything with an AI association and do well. That era is over.
The market is sorting the winners from the pretenders, and it is using a specific test. Companies that can show the spending converting into revenue are being paid for it. Companies that cannot are being punished regardless of how good the underlying business looks.
The four big spenders are guiding to somewhere between $720 billion and $745 billion of capital spending this year, up from roughly $410 billion in 2025. That is an increase of about 75% in a single year, and every one of them now has to justify its share of it quarter by quarter.
Capital is rotating accordingly, and it is moving fast. That creates opportunity for anyone willing to separate one company from another rather than treating the group as one trade.
My Game Plan
Based on these developments I’m particularly interested in looking for an entry into Amazon. That won’t be Friday but it’s now on my watch list and I’ll be tracking it carefully.
My game plan remains the same, with intense focus on stocks that have been unfairly pushed around by recent market volatility ahead of upcoming earnings reports. Small-cap earnings season starts next week and will trigger big moves in many of the smaller names that I favor.
The key is to know what you own and be aware of expectations. Quite often the best trades are found in the movement after the news rather than trying to guess the outcomes in advance.
At the time of publication, Rev Shark had no positions in any securities mentioned.
