The recent earnings season presented a complex picture for artificial intelligence proponents, with major tech companies delivering mixed results as the US Federal Reserve held interest rates steady. While robust AI-driven cloud growth sparked initial optimism, market focus shifted to capital expenditure and impacts on core businesses. Microsoft, a multinational technology company, and Alphabet, the parent company of Google, were central to these developments.
Microsoft delivered strong September quarter numbers; its Azure cloud business, a flagship for AI initiatives, reported 48 per cent revenue growth, exceeding expectations. Overall sales and earnings also surpassed estimates; capital expenditure was lower than anticipated at US$39.4 billion. Its stock gained modestly. In contrast, Alphabet, known for its search engine and advertising, saw AI cloud revenue jump 108 per cent, but its shares plummeted up to 11 per cent, wiping approximately US$395 billion from its market value.
Alphabet’s substantial sell-off stemmed from dual concerns: Group revenue and operating income slightly missed estimates, and search revenue fell below expectations, raising questions about AI’s disruption to its foundational search business. Furthermore, while September quarter capital expenditure was lower, the company forecast significant increases next year, particularly for AI chip-making. Analysts scrutinised these investments’ profitability, a concern also tempering Microsoft’s investor enthusiasm.
Adding to market unease, Federal Reserve Chairman Kevin Warsh, despite outlining strong economic indicators for a rate hike, cryptically explained holding rates. He hinted that rising bond yields and widening credit spreads, notably impacting tech borrowers, had already “taken some heat” out of the AI trade. This suggests market-induced tightening, partly from tech sector scepticism, could influence future monetary policy.
