The Q3 corporate earnings have reaffirmed Big Tech’s pivotal role as the primary growth engine within the S&P 500. Over the past few weeks, the five largest US technology companies have collectively reported sales exceeding $495 billion and combined net income of approximately $130 billion, showcasing robust year-over-year revenue growth ranging from 10% to 25%.
However, this growth now comes with significant investment costs. The era of capital-light software margins is giving way to one defined by substantial capital expenditures, largely driven by ongoing investments in artificial intelligence (AI) infrastructure.
Annualised capital spending across these firms has surpassed $350 billion – a record high – with major investments directed toward data centres, networking, and enhancing AI computing capabilities. Financial markets are increasingly acknowledging that while the AI revolution presents vast opportunities, it also requires large upfront investments.
AI Remains the Core Growth Driver
Artificial intelligence continues to be the central force fuelling sector growth. Microsoft, Google, and Amazon are rapidly expanding their cloud computing and AI infrastructure, with unprecedented data centre-related capital outlays.
Meta is ramping up its focus on AI-powered recommendation systems and metaverse projects, raising its capital expenditure guidance once more. Apple, while more cautious, is signalling deeper integration of AI across its devices and services, maintaining its reputation for disciplined spending.
This strategic pivot has resulted in notable revenue gains tied to AI and cloud services. Yet, for many leading firms, it has also compressed free cash flow and operating margins as they shift from high-margin digital platforms toward more capital-intensive digital infrastructure.
Margins Show Resilience Despite Rising Costs
Despite the surge in spending, operating margins have remained relatively strong. Excluding Meta’s one-off tax charge, the group’s average operating margin stands near 30%, close to pre-AI investment levels.
Alphabet and Microsoft reported slight margin expansions, benefiting from economies of scale in cloud and advertising segments. Amazon saw year-over-year profitability improvements fuelled by growth in AWS and advertising, helping offset challenges in retail operations. Apple continues to excel in operational efficiency, maintaining a net margin close to 25%—a remarkable feat for a hardware-centric company.
Looking Forward
All five major tech players project sustained double-digit revenue growth into 2026, driven by advances in AI services, cloud computing, and advertising recovery. However, they also expect elevated capital expenditures to persist in the near term.
Market participants are weighing this trade-off. Companies like Microsoft and Google, which demonstrate clear paths to monetising AI, have enjoyed positive stock market responses to earnings. Conversely, firms with less immediate visibility on AI returns, such as Meta, face some investor scepticism, as reflected in recent share price reactions following announcements of increased tax and capital spending.
Can the Latest Tech Earnings Sustain the Rally?
With concerns about a potential dotcom-style bubble rising in recent months, investors closely awaited earnings reports from five of the Magnificent 7, the largest US tech companies. Despite some trepidation surrounding Meta’s $30 billion debt issuance to support AI capital expenditures, overall results reassured investors. Most of the industry’s capital spending is being funded through cash flows, providing confidence that these investments are sustainable. For perspective, calculations indicate these leading tech firms have room for an additional 40% increase in AI spending before needing to resort to debt financing.
Several notable highlights emerged from last week’s reports. Amazon’s shares jumped nearly 10% following a 20% revenue increase in its web services division, driven by soaring demand for AI computing power. Cloud revenues at Microsoft and Alphabet grew by 40% and 34% year-over-year, respectively. The tech earnings season is still ongoing. This week, chipmaker Advanced Micro Devices will release its third-quarter earnings, while investors will have to wait until November 19 for results from NVIDIA, which recently became the first company to hit a $5 trillion market capitalisation.
Without favouring any individual stock, the tech earnings season has reinforced the growing momentum behind AI. Top companies are consistently increasing capital expenditures, predominantly funded by cash flows rather than debt, and making strides toward monetising their AI investments. Consequently, we remain confident that AI-related stocks will continue to drive equity markets and advise under allocated investors to consider increasing exposure to this theme through diversified investments.
