Microsoft and Alphabet release earnings Wednesday, while Amazon and Intel release earnings Thursday. The four technology companies face an uncertain test after investors sold Meta shares. MetLife's Drew Matus said investors penalize companies that reduce capital expenditure and companies that increase capital expenditure.
Meta shares dropped 7% on Oct. 22 as AI spending exceeded operating cash flow. Meta's revenue surpassed estimates. Meta's sales increased 26%. Meta recorded $34.9 billion in third-quarter capital expenditure, exceeding operating cash flow.
Bloomberg's hosts said Microsoft, Alphabet, Amazon and Intel represent about 15% of the Nasdaq 100. Bloomberg's hosts said the Nasdaq 100 has declined roughly 7% this month. Matus said investors want evidence that AI contributes to long-term growth. Matus said arguments over employment and profits will continue.
Meta also introduced a new category of nonvoting Class C stock. Scotiabank said management had indicated that raising equity might be necessary. Alphabet shares declined about 4% in after-hours trading in July after Alphabet increased capital expenditure guidance. A review of filings found that AI capital expenditure was depleting cash at Microsoft and Amazon.
Matus doubted companies would spend their announced budgets this year because companies first need to secure workers, equipment and land. However, Matus said industries with the greatest exposure to AI are increasing employment rather than reducing employment.
The Federal Reserve meets on Oct. 27 and 28. The Federal Reserve announces the policy decision Wednesday afternoon, hours before Microsoft and Alphabet are scheduled to report. The Federal Reserve increased interest rates in September to a range between 3.75% and 4%. Traders reduced bets on an October rate increase after Chair Kevin Warsh said higher inflation had not altered Warsh's view. Matus expects Warsh to leave rates unchanged and reconsider policy in December.
Matus argues that AI simultaneously drives capital expenditure, stock market gains and consumer spending. Matus considers that concentration in the economy more concerning than concentration in the stock market. A disappointing outlook from just one company could consequently test the entire chain.
Big Tech Earnings Face Investor Scrutiny Amid AI Spending and Rate Uncertainty
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Summary
Investor sentiment is closely tracking major tech earnings as Microsoft, Alphabet, Amazon, and Intel prepare to report. Drew Matus of MetLife said investors are reacting sharply to shifts in capital spending, as seen in Meta’s 7% drop on October 22 when AI costs outpaced cash flow. The Nasdaq 100 has fallen about 7% this month, with Microsoft and Amazon seeing cash drained by AI investments. The fear and greed index remains volatile ahead of the Fed’s October 27 policy decision, with Matus predicting no rate hike in October and a possible review in December.
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