Wall Street's concerns over AI spending costs have been simmering beneath a relatively calm market surface for months, and now appear to be erupting once again.
Microsoft reported a fundamentally solid earnings report last Wednesday, yet more investors focused on the stalled growth of its Azure cloud computing business and its projected capital expenditures exceeding $100 billion this year.
This ultimately led to Microsoft's worst weekly performance since March 2020, including a single-day plunge of 10% last Thursday, with the sell-off continuing into Friday—wiping out a staggering $381 billion in market capitalization in just two trading sessions.
"In a normal environment, Microsoft's results would actually be quite good. But against the backdrop of such massive spending, and with market expectations priced to near perfection, you need to hit every single metric," commented Josh Chastant, a public portfolio manager at GuideStone Funds, which holds Microsoft shares.
This perspective finds some corroboration in another "Magnificent Seven" stock, Meta. While Meta's recent earnings forecast predicted its fastest quarterly revenue growth in over four years, sparking a 10% surge in its stock price last Thursday for its best single-day performance since July, the company also indicated plans to increase capital expenditures by up to 87% by 2026. This negative factor subsequently impacted the stock, which fell nearly 3% on Friday, marking its worst single-day drop since October 30th of last year.
These market reactions reveal that tech giants are currently walking an increasingly narrow tightrope. The three-year rally in AI has been built on a bet that these companies' substantial financial resources and aggressive investments will position them at the forefront of the next transformative technology. Investors can tolerate huge expenditures as long as growth supports them; otherwise, these companies must be prepared for punishment.
"We have entered an era where the monetization of AI capital expenditure is necessary to justify tech stock valuations," said Chastant, who manages approximately $24 billion in assets.
This topic will undoubtedly remain a key focus for market professionals and retail investors this week, as two other major AI spenders, Google and Amazon, are scheduled to report earnings after the market closes on Wednesday and Thursday, respectively.
According to industry aggregates, the combined capital expenditures of these two companies, along with Microsoft and Meta, are projected to exceed $500 billion this year, with the majority funneled into AI computing infrastructure.
Among them, market expectations for Google are currently the highest. Over the past six months, the company has been the standout performer among the "Magnificent Seven," with its stock surging over 70%. The success of its Gemini AI model and enthusiasm around its custom AI processors, which are expected to boost cloud computing growth, have driven the stock higher.
After hitting a record closing high last Thursday, Alphabet's stock dipped slightly on Friday. Its forward price-to-earnings ratio now stands above 28 times, near its highest level in nearly two decades.
Amazon faces pressure to maintain its growth momentum, as its AWS cloud unit, the world's largest, recorded its strongest expansion in nearly three years last quarter.
"Not all growth rates are going to meet expectations. Over the long term, market expectations can take a significant hit," said Peter Corey, co-founder and chief market strategist at Pave Finance, which manages $20 billion in client assets.
There are signs that many investors are already pulling back from some of their tech bets. An index tracking the "Magnificent Seven" has fallen 1.5% from its record closing high three months ago, while the S&P 500 has gained 0.7% over the same period. Declines in other tech-related stocks have been even more severe.
Take Oracle, for example. Frenzy over its cloud business growth had propelled its stock up 97% in 2025, but it has since been halved from its peak last September. The sell-off stems from doubts about the viability of capital expenditure commitments from loss-making startups like OpenAI, coupled with concerns over the exorbitant costs of expanding computing capacity.
"What we're really worried about is not just one company spending a huge amount of capex and getting very little for it," said Bob Savage, head of market macro strategy at BNY Mellon. "That forces the market to step back and question the strategy, but we don't have enough information yet to answer that question."
In fact, this bearish sentiment has been building for months. According to the latest available data compiled by Barclays, by the end of the third quarter, the tech sector was the most underweighted sector among actively managed fund managers. Data from Deutsche Bank last week showed that self-directed investors have been consistently rotating out of mega-cap tech stocks into cyclical sectors like materials and industrials this year.
"Pressure remains on the mega-cap tech stocks, the rotation is still on, and there isn't enough evidence yet to convince investors that these companies can grow faster than they are spending," Savage noted.
Hedge funds are also retreating from the sector. According to Goldman Sachs' prime brokerage data, for the week ending January 23rd, the information technology sector was the largest net sold sector for two consecutive weeks.
The key to reversing the trend, Pave Finance's Corey pointed out, is for companies to demonstrate that their AI investments are paying off. "The crux of the matter is how these massive capital expenditures translate into excess returns," he emphasized. "Before reaching the promised land of expected returns, the market is likely to encounter more turbulence along the way."
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