As earnings season kicks into high gear, investors are looking beyond the headline and guidance numbers.
NEW YORK: The stock market was rattled by a slide in most megacaps, which showed no signs of easing up on artificial-intelligence spending even as doubts persist about demand to justify all that capital.
Big moves in commodities saw gold plunging as oil soared. Bitcoin dipped below US$84,000.
While gains in economically sensitive shares pulled the S&P 500 away from session lows, technology giants dragged down the Nasdaq 100 by 1%. Microsoft Corp. tumbled 12% – the most since 2020 – on concern it could take a while for AI investments to pay off. Meta Platforms Inc’s solid outlook eased worries about its spending plans. Apple Inc reports results later Thursday.
Wall Street is gearing up for a borrowing bonanza to bankroll AI projects that could push February corporate bond sales to a record, even as warnings against complacency continue to percolate. International Business Machines Corp is selling dollar and euro bonds after reporting solid results.
The "Magnificent Seven” tech giants have led the stock market higher for much of the past three years. But that reversed at the end of 2025 as Wall Street grew sceptical of the hundreds of billions of dollars the companies are spending to develop AI and when the returns on those investments will materialize.
"The one-way bet on AI leadership is now starting to look overcrowded,” said Fawad Razaqzada at Forex.com. "There is now some fear creeping into investors’ minds that the AI theme may not be as immediately lucrative as hoped.”
Still, all is not lost, he noted. The fact that the Nasdaq is easing back from elevated levels is a clear sign "it is far too early to talk about the peak in tech,” Razaqzada said.
The day after the Federal Reserve decided to stand pat saw an uneventful batch of economic data. President Donald Trump said he would announce his nominee to chair the Fed "next week,” and reiterated his expectation that the central bank’s new leader will lower interest rates.
The S&P 500 fell 0.6% after earlier sliding as much as 1.5%. The yield on 10-year Treasuries dropped two basis points to 4.23%. The dollar barely budged while still heading for its worst month since June.
Gold reversed an earlier rally that took the precious metal to a record above US$5,500. Brent crude topped US$71 after President Donald Trump warned Iran to make a nuclear deal or face military strikes.
As earnings season kicks into high gear, investors are looking beyond the headline and guidance numbers. They seek clarity on the impacts of the evolving trade landscape as well as clues regarding the trajectory of AI capital investments, according to Rob Anderson and Thanh Nguyen at Ned Davis Research.
"Earnings could help solidify the rotation away from growth to value if growth rates and revision trends continue to suggest a broadening beyond the tech megacaps later this year,” they said. "Conversely, a strong quarter from the megacaps could help growth sectors regain leadership status.”
While earnings growth for the "Magnificent Seven” is expected to continue to outpace the remaining S&P 500 shares in each quarter in 2026, the gap is seen narrowing throughout the year, they noted.
The group of big techs is expected to post 20% profit growth for the fourth quarter, which would be the slowest pace since early 2023, according to data compiled by Bloomberg Intelligence.
"If revision trends continue to suggest earnings will broaden throughout 2026, it could support the case for the value rotation that began at the end of October to persist in 2026,” said Anderson and Nguyen.
After years that saw a handful of megacap AI firms do the heavy lifting, traders are questioning the durability of the trade, prompting money managers to diversify away from the bull market’s longtime winners.
"The AI theme is overcrowded, and investors are revaluing the AI trade, so they are re-weighting big-tech stocks in their portfolios,” said Matt Maley at Miller Tabak & Co.
This week brought the first wave of major tech earnings, and a clear theme is emerging, according to Angelo Kourkafas at Edward Jones.
"Companies are ramping up AI‑related infrastructure spending, and markets are rewarding those that can turn these investments into earnings,” he said. "Firms without a clear monetisation strategy are facing more scrutiny.”
More broadly, Kourkafas says the tech sector is still expected to deliver strong profit growth in the S&P 500, with AI remaining an important catalyst.
"However, that growth is slowing from earlier quarters even as other sectors accelerate, supporting what we see as this year’s key theme: a broadening of market leadership,” he concluded.
Investors appear a little more willing at the start of the year to rebalance at least some of their positioning away from the AI trade, for valid reasons, and toward asset categories, sectors, industries, and companies that are more exposed to the "real” economy, accorrding to Anthony Saglimbene at Ameriprise.
"Unless reports from Mag Seven companies materially reset the earnings outlook (which we believe will not be the case), the early-year preference for small caps and non-tech cyclicals could remain intact as investors seek a wider base of earnings contributors and index performance participants,” he said earlier this week.
After three consecutive years of double-digit returns, the equity markets have proven to be incredibly resilient. However, the outlook for 2026 is for a "bull market with a lowercase ‘b’”- defined by episodic volatility, aggressive sector rotations, P/E multiple contraction, and outperformance by small- and mid- cap stocks, according to Craig Johnson at Piper Sandler.
"Under the surface, a true stock-picker’s market is emerging with more constructive charts setting up across many sectors,” Johnson said. "We reiterate our S&P year-end price objective of 7,150 - a modest single-digit gain - but note that the real opportunity this year lies in stock picking, not at the index level.”
Wall Street’s record-setting stock rally loading high profit expectations into share prices, investors are punishing companies heavily for disappointments, with the average post-results stock move relative to the benchmark index showing a drop of half a percentage point – the first negative reading in two years.
Meta will double capital spending to as much as US$135 billion this year, an all-in bet on AI. Tesla Inc will spend US$20 billion this year on pursuits including AI, self-driving vehicles and robotics - almost double Wall Street estimates _- and plow another US$2 billion into chief executive officer Elon Musk’s xAI startup.
Meantime, Microsoft’s spending surged to a record high and cloud sales growth slowed, triggering investor concerns that it could take longer than expected for the company’s AI investments to pay off.
During the analyst call, Microsoft chief executive officer Satya Nadella said companies are now paying for 15 million subscriptions to the M365 Copilot, Microsoft’s main AI tool for office workers. Adoption is growing among the company’s enormous base of corporate users, Nadella said.
"In addition to measuring AI monetisation via cloud revenue growth, we are increasingly seeing evidence of productivity gains due to AI adoption,” said Ulrike Hoffmann-Burchardi at UBS Global Wealth Management. "As in any innovation cycle in the past, we expect to see a performance handover from the enablers to the users, and companies that leverage AI to improve business outcomes should see tangible financial benefits.”
That means AI beneficiaries are likely to "broaden” not only to the intelligence and application layers of the value chain, but also to other sectors such as financials and health care, she said.
"So, we maintain our conviction that AI innovation will continue to drive equity returns in the coming years, and investors should broaden their exposure across the value chain,” Hoffmann-Burchardi concluded.
While some investors are raising alarms of a looming bubble in AI, Blackstone Inc president Jon Gray is focused on what happens when industries change overnight, like what happened to "the Yellow Pages back in the ‘90s when the internet came along,” he said Thursday in a Bloomberg Television interview.
"Every deal that we’re doing today, in the first two pages of the memo, we’re saying, ‘What is the AI risk?’” Gray said.
Legendary investment strategist Jeremy Grantham, known for forecasts that have occasionally presaged major market dislocations such as in 2000 and 2008, argues that the current AI boom is a classic technology bubble wrapped around a genuinely transformative innovation, and that history suggests both the promise and the peril are real.
"The rule from history is that great technological innovations lead to great bubbles,” the co-founder of GMO said. "AI is maybe the most visibly impressive innovation of the last 100 years, perhaps of a magnitude equal to the railways of the 19th century. It should not be surprising that it appears to be moving through the same pattern both rapidly and powerfully.”
Grantham argues that when investor confidence eventually reaches its limits, "the deflating of the AI bubble will lead to a major stumble for the economy, a plunge in profits, and a severe decline in valuations.” He notes that AI reversed a developing bear in late 2022 "like a multi-stage rocket,” reigniting speculation around a narrow group of market leaders even as valuations moved further away from long-term norms. — Bloomberg
