The Stock Market Is Crashing. How Much Is Big Tech’s A.I. Bubble to Blame?

On Monday (Aug. 5), the S&P 500 saw its worst day in two years, falling 3 percent. The Dow Jones Industrial Index and Nasdaq also shed 2.6 percent and 3.4 percent, respectively. The Japanese Nikkei Index, meanwhile, lost a whopping 13.4 percent, logging its worst day since 1987. Investors began dumping shares after last Thursday’s jobs report showed unemployment had risen to 4.3 percent, the highest level since late 2021, fueling worries that the U.S. economy could be backsliding into recession. The “Magnificent Seven” companies (Meta (META), Microsoft (MSFT), Amazon (AMZN), Apple (AAPL), Alphabet (GOOGL), Tesla (TSLA) and Nvidia (NVDA)), which make up roughly a third of S&P 500’s market value, collectively lost $653 billion in market cap in one day, reflecting investor sentiment that Big Tech companies’ A.I. promises that have buoyed the stock market thus far may not be coming to save the day.

This week’s stock rout followed generally lackluster quarterly earnings from Meta, Microsoft, Amazon, Apple and Alphabet. With the exception of Apple, the other four companies all reported increased capital spending on A.I. projects in the latest quarter and expect spending to grow further in the second half of the year.

Here are the top takeaways from Big Tech’s latest quarterly earnings.

Microsoft

Microsoft earnings on July 30 caused Nvidia’s stock to pop 13 percent but its own to fall 7.8 percent after CEO Satya Nadella and CFO Amy Hood said the company would increase spending on its computing infrastructure. Investors were disappointed to see Microsoft’s cloud revenue rise only 29 percent year-over-year during the past quarter. (Analysts were expecting a 31 percent growth.)

For the April-June quarter, Microsoft reported CapEx of $19 billion, up 78 percent from a year ago. The majority went towards cloud and AI-related projects. But A.I. services contributed only 8 percentage points to Azure’s revenue growth, falling short of investors’ expectations of a major uptick from the 7 percentage points in the previous quarter.

Microsoft results:

• Revenue was 64.73 billion, up 15 percent y-o-y and beating expectations of $64.52 billion.
• Earnings per share was $2.95, up 11.3 percent y-o-y and beating expectations of $2.93.
• Net income was $22.04 billion, up 9.7 percent y-o-y.

Amazon

Amazon stock dropped 11 percent on Aug. 1 after the company’s quarterly revenue missed analyst expectations. This is despite aggressive cost-cutting measures that allowed Amazon to nearly double its operating income from the previous year to $14.7 billion during the April-June quarter.

Like its Big Tech peers, Amazon is investing heavily in A.I. but has yet to show investors the bet is paying off. Most of Amazon’s A.I. revenue is expected to come through its cloud computing business, Amazon Web Services (AWS). While the growth in AWS was promising, with revenue rising double-digits from the previous year, Amazon’s leadership did not make clear how much of that growth was attributed to A.I. and what investors can expect in the future. CFO Brian Olsavsky said last week Amazon spent $30 billion in the first half of 2024 to expand AWS’s A.I. tools and expects that spending to grow even more in the second half of the year.

Amazon results:

• Revenue was $147.98 billion, up 10 percent y-o-y but falling short of the $148.56 billion expected. (AWS revenue was $26.3 billion, up 19 percent y-o-y and beating the $26 billion expected.)
• Earnings per share was $1.26, up 93 percent y-o-y and far exceeding the $1.03 expected.
• Operating income was $14.7 billion, up 91 percent y-o-y.

Alphabet

Google (GOOGL)’s parent company was unable to convince investors its crown jewel product, Google Search, would be resilient to competition from OpenAI and other A.I. chatbots, causing the stock to fall 5 percent after earnings on July 23. This is despite the company’s search revenue rising 14 percent to $49 billion.

Alphabet’s leadership expects the company’s CapEx in 2024 to hit around $50 billion, primarily targeted toward A.I. capabilities. Ruth Porat, Alphabet’s chief investment officer and chief finance officer for Alphabet, did not go into specifics about how much revenue growth could be attributed to A.I. but noted the company has “seen the benefit of our strength in A.I., A.I. infrastructure, as well as generative A.I. solutions for cloud customers.”

In May, Google rolled out AI Overviews, which provides summarized responses to search queries, allowing the user to skip having to flip through sources. The feature received mixed reviews initially, but Alphabet promised it would improve the function to reduce hallucinations and inaccuracies.

Alphabet results:

• Revenue was $84.74 billion, rising 13.6 percent y-o-y and beating the $84.19 billion expected.
• Earnings per share was $1.89, rising 13.6 percent y-o-y and beating the $1.84 expected.
• Profit came in at $23.6 billion, rising 29 percent y-o-y and beating expectations of $22.7 billion.

Meta

Meta had a better Q2 and a more promising earnings call than its Big Tech peers, sending shares to jump 7 percent on July 31. The social media giant said it would increase the lower-end of its expected CapEx, primarily on developing A.I. capabilities, from $35 billion to $37 billion while maintaining its upper-end expectation of $40 billion.

Meta recently released Llama 3.1, its most powerful open-source large language model yet. It is a direct competitor to OpenAI’s GPT, Google’s Gemini, and Anthropic’s Claude. In April, Meta released a ChatGPT competitor named Meta AI. CEO Mark Zuckerberg said on the earnings call that Meta AI “is on track to be the most used A.I. assistant in the world by the end of the year.

Meta results:

• Revenue was $39.07 billion, up 22 percent y-o-y and beating the $38.31 billion expected.
• Earnings per share was $5.16, up 73 percent y-o-y and beating the $4.73 expected.
• Net income was $13.49 billion, up 73 percent y-o-y.

Apple

Apple has been more insulated from the A.I. buzz compared with its Big Tech peers, a result of the company’s focus on hardware products and wearables. The iPhone maker saw its shares stay flat after reporting earnings on Aug. 1 despite beating analyst expectations on both revenue and profit. The muted market response was partly due to a 1 percent decline in iPhone sales during the April-June quarter.

Apple launched its own suite of A.I. offerings, called Apple Intelligence, in June. CEO Tim Cook promised that the features “will transform how users interact with technology” from writing to image creation to summarizing and prioritizing notifications.

Apple results:

• Revenue was $85.78 billion, up 5 percent y-o-y and beating the $84.53 billion expected.
• Earnings per share was $1.40, up 11 y-o-y and beating the $1.35 expected.
• Net income was $21.45 billion, up 8 percent y-o-y.