Tension between Silicon Valley's astronomical AI spending and Wall Street fears that it won't pay off had been sending markets on a wild ride. Then Microsoft gained nearly half a trillion dollars in one day.
The company's stock surged 16% after its earnings quelled concerns that investments on data centers, chips and more would outpace the company's ability to generate cash. Microsoft's $450 billion one-day gain in market capitalization was the largest by any U.S. business, ever.
On the other hand was Meta Platforms. Shares dived 8% following projections that free cash flow would turn negative in the latter half of this year for the first time since the Instagram-parent went public in 2012. Meta stock's 11th consecutive decline notched its longest losing streak on record.
A day after Federal Reserve Chairman Kevin Warsh showed reluctance to raise interest rates, sparking a steep selloff in stocks and bonds, Microsoft's outlook won out. Major indexes rebounded, led by the Nasdaq composite's 2.8% gain. The S&P 500 climbed 1.7%, and the Dow Jones Industrial Average rose 1.2%, or 614 points, with Microsoft responsible for around 360 of them.
The divergent responses to Meta and Microsoft hinted at how Wall Street will answer a question at the heart of the AI trade: whether companies pouring hundreds of billions annually into the tech race can show investors the money. If not, Silicon Valley's onetime cash-printing machines will have to increasingly finance their expansion through debt -- just as that debt is getting more expensive.
"I think there's a recognition that this trend can't go on forever," said Jack Ablin, founding partner at money manager Cresset. "They're going to need to start seeing revenue growth."
Though some investors interpreted Warsh's lack of guidance Wednesday as a signal to pare back risk, traders Thursday piled on more. Oracle, which is heavily reliant on debt to fund its capital expenditures, zoomed 8.3% higher. Amazon shares climbed 3.9% before it reported its quarterly results. That stock jumped in after-hours trading after the company beat analysts' expectations.
The hyperscalers' still-growing spending plans also helped fuel a turnaround in chip stocks that have been battered in recent weeks. Nvidia and Broadcom both advanced, while Micron, Sandisk, Western Digital and Intel each posted double-digit gains.
All three major indexes remain in the red in July, thanks in part to new supplies of big-tech stocks flooding markets and ripple effects from a downturn in the chip-heavy South Korean stock market. Retail traders dumped tech shares in recent days, analysts say, as did highflying AI-focused hedge fund Situational Awareness.
That pressure has at least momentarily flushed some AI concerns out of the market, said Trevor Slaven, Barings' global head of asset allocation and multiasset portfolio solutions. Add in a big growth in profits elsewhere in Corporate America, and he is tactically bullish on stocks.
"This is a one, two, three-month view," Slaven said. "It's going to be more volatile on the way up and the way down." Longer term, he added, "the competitive nature of [the AI build-out] almost necessarily means that you will overspend."
Excluding data-center deals, hyperscalers this year are on track to issue about $250 billion in debt for their capital expenditures, a figure estimated to grow to $400 billion in 2027, Goldman Sachs projected recently. The bank's analysts expect the companies will add another $1.3 trillion over the following three years.
Of that group of five companies -- Amazon, Oracle, Alphabet, Meta and Microsoft -- Microsoft relies on debt far less than its peers. The company's free-cash flow last quarter totaled $19.6 billion, whereas Meta generated less than $800 million.
Big swings in AI stocks have reversed before, and some traders saw Thursday's moves in the two companies' shares as an opportunity to swoop in.
Individual investors bought the dip in the Facebook parent, according to flow-tracking firm Vanda Research, snapping up $36 million of shares and making it the second-most popular stock of the session. On the other end of that list was Microsoft, which saw roughly $167 million in net retail outflows.
Still, with inflation elevated and longer-dated Treasury yields near their highest levels in years, tightening financial conditions are forcing investors to parse such companies' performances more closely.
"Investors have become too myopic about the words 'AI' and 'data center' and they're not stepping back and looking at what's going on," said Richard Bernstein, global head of macro investing at Janus Henderson. "As the free money is going away, investors are starting to look at fundamentals again. We're starting to take out the speculative fervor."
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