(Bloomberg) – When the two largest participants in the cloud report earned this week, the amount of company spending is as interesting to investors as their revenues.
Before Wednesday’s results for Microsoft Corp. and Amazon.com Inc., reports suggest that both companies could cut their spending on their AI infrastructure.
This has brought attention to the capital expenditure announced in the latest earnings, which will give insight into the prospects of AI demand and the broader consequences that could have on the economy.
“The slowdown in cloud computing or capital expenditure will scream economic caution and cope with the fear of recession in U.S. companies,” said Joe Tigay, portfolio manager for Rational Equity Armor Fund. “Any reduction in growth is harmful to valuations and can cause damage to the entire market. While the multiples have dropped a lot, with any historical measures, we are not very cheap. If we are on the road to recession, the multiples will be much lower.”
Both Microsoft and Amazon are declining this year, largely tracking lower markets as tariff risks expand concerns about economic growth. Amazon enjoys over 20% of its February peak, while Microsoft hasn’t reached an all-time high since July.
Four biggest spending on AI infrastructure – Alphabet Inc. and Meta Platforms Inc., along with Microsoft and Amazon, are expected to spend more than $300 billion in the current fiscal year. The money has invested in AI-related investments, causing stock earnings to soar in companies such as Nvidia Corp., Super Micro Computer Inc. and Arista Networks Inc.
Recently, however, Microsoft and Amazon have been at the center of a shift in industry spending expectations. Bloomberg News reported that Microsoft has withdrawn from global data center projects, with some of the pauses suddenly emerging. TD Cowen analyst Michael Elias wrote last week that channel inspections were instructing “deletion of MSFT equipment” provided by data centers for “long time.”
Additionally, Wells Fargo Securities wrote that Amazon’s web services business is suspending some data center rentals, although Kevin Miller, vice president of global data centers for Amazon Web Services, then wrote: “There is no recent fundamental change in our expansion plan” and it continues to see “a strong need for the underlying workload on production AI and AWS.”
Alibaba Group Holding Ltd. The emergence of DeepSeek, a Chinese artificial intelligence startup, predicts future spending after new immigrants claim to perform less and require fewer chips as compared to the U.S. model. Investors are also increasingly looking for AI investments to translate into growth in a more obvious way.
Ned Davis Research closed its overweight advice on AI stocks last week and wrote that the group’s downturn could continue, especially with new risks posed by the Trump administration’s trade war.
“Higher policy uncertainty often leads to lower capital expenditures. We believe the reasons for data center capital expenditures will be excluded,” wrote Pat Tschosik, chief theme strategist at the company. “AI spending is seen as discretion, just like companies retreating from development of AI applications after they retreated in a recession.”
Alphabet Inc. reported capital expenditure of $17.2 billion in the last quarter, slightly higher than expected. It plans to spend $75 billion on capital expenditure this year.
Google parents also released more than expected operating profits for their Google Cloud Business, even with a slight consensus among analysts. The company said it demands more customers than the company’s capabilities for the cloud business, which echoes comments from all three cloud giants last quarter.
Microsoft’s results are expected to show net earnings growth of 9.7% and revenue growth of nearly 11%. Amazon’s revenue grew 8.2%, and net income soared nearly 40%. Both are expected to continue to grow in the coming years, a key reason why Wall Street is almost unified and positive. For both names, more than 90% of analysts tracked by Bloomberg recommend buying stocks.
Jim Worden, chief investment officer of Fortune Consulting Group, is one of the people who keep a positive view of the couple.
“I don’t think we’re going to see a big drop in capital expenditure, although there might be a discussion of more effective and how to best spend money,” he said. “The uncertainty is still very high, but we hardly touch the surface of AI demand and use cases, so investors need to be patient and play a long game.”
ServiceNow soared 22% last week after the software company released its sales growth outlook, limiting record weekly earnings, which analysts’ estimates are higher than analysts’ estimates, suggesting that software demand remains resilient even if the economy is threatened by tariffs.
Earnings due Tuesday
– Assistance with Subrat Patnaik.
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