Alphabet's sharp share price drop after raising its capital expenditure budget has sounded an alarm for Microsoft, Meta, and Amazon, which are about to report earnings. Microsoft's Azure is showing strong growth, and Copilot monetization is accelerating; Meta faces pressure from plateauing user growth and rising spending; AWS growth may hit a new high. Fitch warns that a capital-intensive transformation could erode credit quality, as investors urgently seek signs of returns on AI investments.
The AI arms race among tech giants is facing a critical test of investor patience. Microsoft, Meta, and Amazon are set to report quarterly earnings this week, with the focus shifting from revenue growth to a more fundamental question: When will the ever-expanding capital expenditures finally deliver returns?
This test is set against the backdrop of Alphabet's recent lesson. The company posted its highest-ever quarterly profit of $112.1 billion, but its shares fell over 7% as investors were alarmed by its decision to raise its 2026 capital expenditure forecast by $15 billion.
The combined capital expenditure of Alphabet, Microsoft, Meta, and Amazon is expected to reach $700 billion this year, with Wall Street forecasting it could surpass $1 trillion by 2027.
This fragile market sentiment sets the stage for the earnings season for these three companies this week. According to Bloomberg, citing UBS Global Wealth Management, "Limited visibility into capital spending beyond 2027, coupled with heightened investor demands for spending discipline, could continue to weigh on risk appetite." Meanwhile, Moody's, a Fitch Ratings affiliate, warned last week that sustained capital expenditure plans could "threaten credit quality," with the direct debt of six large tech companies totaling approximately $460 billion.
Microsoft: Azure's Momentum Strong, Copilot Monetization Enters New Phase
Among the three companies, Microsoft faces perhaps the clearest earnings expectations. Analysts expect Microsoft's capital expenditure to surge 74% year-over-year this quarter. At the same time, the market has high expectations for Azure cloud services growth.
According to a Morgan Stanley research report, analysts are confident that Microsoft's Azure will achieve roughly 41% growth at constant currency in the fiscal fourth quarter, about one percentage point above the high end of management's guidance of 39% to 40%. Morgan Stanley's confidence is based on positive feedback from channel partners, improving GPU supply, and its own CIO survey results—72% of CIOs expect to increase spending on Microsoft solutions in the next year for cloud migration scenarios, with Microsoft leading all vendors in expectations for incremental IT budget allocation.
Copilot's commercial progress is also under the spotlight. In the fiscal third quarter, paid M365 Copilot seats rose from 15 million to 20 million, with management guiding that net paid seat additions will continue to increase sequentially. Morgan Stanley notes that Copilot's monetization path is evolving into three parallel growth drivers: direct seat sales, user migration to the higher-value E7 subscription tier, and consumption-based AI service pricing. Notably, Microsoft's price increase for commercial M365 took effect for new customers on July 1, 2026. Morgan Stanley expects this pricing adjustment to contribute incremental revenue of approximately $2 billion, $4 billion, and $6 billion in FY27, FY28, and FY29, respectively.
On capital expenditure, Morgan Stanley believes street estimates remain conservative and have room for upward revision. Management previously disclosed that it expects capital expenditure of around $190 billion for the calendar year 2026, with about $25 billion attributed to component price increases. The firm maintains an "overweight" rating on Microsoft with a $600 price target, arguing that the current price-to-earnings ratio of roughly 16x for FY28 is "too cheap" and fails to reflect the company's sustained high-growth potential.
Meta: Under Pressure from Plateauing User Growth, Capital Expenditure May See Significant Upward Revision
Meta's situation is more complex. According to Bloomberg, citing Bloomberg Intelligence (BI) analysis, Meta may "significantly" raise its capital expenditure guidance to address the pressure from rising component costs—the same core trigger that led to Alphabet's stock decline last week.
Meanwhile, user growth faces new pressure from regulatory fronts. As regulators worldwide push legislation to limit social media use by teenagers, Meta's user growth outlook will face greater strain. The "Family Daily Active People" metric, which measures daily active users across its four core products, is expected to record its weakest growth since 2021.
Amazon: AWS Growth Could Hit a New High Since 2022
Compared to Microsoft and Meta, market expectations for Amazon's earnings are relatively optimistic. According to Bloomberg, citing Truist analysis, Amazon's overall revenue growth could reach 17%, the highest in nearly five years. Amazon Web Services (AWS) growth could surpass 30%, marking a new high since 2022. Strong demand for AI-related services is seen as the core driver of AWS growth.
However, Amazon also faces scrutiny on capital expenditure. After Alphabet's stock fell on its raised spending forecast, investors remain highly vigilant about whether these three companies will further increase their capital expenditure outlook for 2027 and beyond.
Fitch Warning: Balance Sheets Under Pressure, Credit Risks Emerge
A Moody's research report last week set a grim tone for this week's earnings season. The agency noted that Alphabet, Microsoft, Amazon, Meta, Oracle, and CoreWeave are transitioning from asset-light models based on software, intellectual property, and cloud services to asset-heavy models requiring "unprecedented investment levels," a trend that could pressure the credit metrics of these companies.
"These are large, well-established companies with balance sheets that are, in many cases, pristine, but they are embarking on a nearly unprecedented level of capital spending," said Kevin McNeil, Moody's Vice President, on the agency's podcast. "The increase in capital intensity could cause free cash flow to turn negative for some, or at least contract significantly." He further noted that debt financing "could increase leverage and introduce additional balance sheet risk."
Among the six companies under scrutiny, Oracle is in the most vulnerable position. Moody's has revised its credit rating outlook for Oracle to negative, with its Baa2 rating just two notches above junk status. Last month, another rating agency, S&P Global, also downgraded Oracle to just one notch above investment grade. In contrast, Alphabet, Amazon, Meta, and Microsoft still maintain solid balance sheets, with their investment-grade ratings safe for the near term.
Bull vs. Bear Debate: Will AI Investments Pay Off or Overextend the Future?
Faced with expanding capital expenditures, the market is clearly divided. The core logic of the bulls is that demand is real, and the constraint on growth is supply, not demand. Taking Azure as an example, Morgan Stanley points out that Microsoft CFO Amy Hood explicitly stated on the last earnings call that Azure's guidance is essentially "allocated capacity guidance," with growth constrained by data center construction progress and GPU deployment timelines, not customer demand. As Microsoft plans to double its total data center capacity over the next two years, this constraint is expected to gradually ease.
Bears, however, focus on the lack of visibility into returns. UBS Global Wealth Management notes that "limited visibility into capital spending beyond 2027" is a key factor suppressing investor risk appetite. Moody's warning is more direct: the shift from asset-light to asset-heavy models is eroding the high free cash flow advantages these companies have historically prided themselves on.
For long-term investors, UBS still recommends holding steady: "For long-term investors with diversified portfolios, maintaining investments is the most effective strategy to navigate current uncertainty. Given strong earnings growth and an improving cyclical backdrop, attractive stock opportunities exist across sectors and regions." However, with Alphabet's cautionary tale in mind, the market's verdict is clear: Good earnings are not enough; spending must also be kept in check.
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