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Big Tech under pressure as Microsoft results put AI costs in spotlight

Microsoft’s results placed AI costs in the limelight, putting pressure on Big Tech.

As Microsoft’s results showed how the high-stakes competition for AI supremacy could cost the IT giants, whose shares have risen in recent months on hype surrounding the technology, a number of major U.S. technology companies experienced losses on Wednesday.

As the business announced an aggressive spending plan for AI, Microsoft’s shares dropped 3.6% in early trade. The company said that deeper expenditures in AI are necessary before benefits can be seen in the bottom line.

If the losses continue until the end of trading, Microsoft’s market capitalization will drop by roughly $100 billion. Up until yesterday’s closure, its shares had increased by 46.4%.

“AI will generate a lot of revenue and earnings for such firms, but many investors have been buying the rumor and now that we have earnings, they are taking profits,” said Paul Nolte, senior financial advisor and market strategist with Murphy & Sylvest.

“AI is still generating a lot of excitement, but nobody really knows what that means for the financial health of many of these companies,”

The multiple megacap growth names that make up the NYSE FANG+ index were down 0.2%. The hype surrounding AI has caused the index to increase by nearly 76% so far this year.

Alphabet, parent company of Google, stood out. After the business exceeded expectations for second-quarter earnings, its shares increased by 5.6%. It appears that Alphabet will increase its market capitalisation by around $100 billion.

Microsoft’s value has increased as a result of the current rally. The company is currently trading at 31 times projected 12-month earnings, while Alphabet is trading at a PE multiple of 20.

According to Mark Haefele, global wealth management chief investment officer at UBS, “the tech earnings season has started on a mixed note.”

The performance of IT stocks for the remainder of the third quarter will greatly depend on the tone established by quarterly reports over the coming week.

A expected Federal Reserve interest rate hike later in the day that could raise borrowing costs to their highest level since the global financial crisis kept investors on Wall Street’s main indexes in check on Wednesday.

Since the Fed began its cycle of tightening monetary policy to combat inflation, large tech businesses that rely largely on borrowed funds have come under pressure.

Tech stocks have been boosted recently, meanwhile, by optimism regarding AI and expectations that the Fed’s run of rate hikes is coming to an end.

According to Stuart Cole, chief macro economist at Equiti Capital, as many IT stocks depend on strong economic growth to provide the gains they offer, they are typically very exposed to such sentiment around central bank policy.

“There are legitimate worries that the U.S. economy is deteriorating, but the Fed will maintain its hawkish stance until it sees consistent evidence of easing inflationary pressures, even at the risk of pushing the economy into negative growth.”

After Alibaba’s cloud computing business announced that it had become the first Chinese company to support the company’s open-source artificial intelligence (AI) model Llama, shares of Meta Platforms Inc. increased by 1.0%.

Following news that the Federal Trade Commission is finishing an antitrust action against Amazon, Amazon stock fell 1.3%.
After the owner of the photo messaging app, Snap Inc., released a lower third-quarter outlook than anticipated on Tuesday, the company’s shares fell 18.3%.

Mark Shmulik, a stock analyst at Bernstein, stated that bandages have not yet been able to repair bullet wounds.

In an effort to increase user engagement, the business’s Snapchat app has incorporated a new AI-powered chatbot that can respond to inquiries. However, Shmulik observes that the company has had difficulty sustaining revenue growth and keeping up with competitors like Facebook-owned Meta.

Snapchat is attempting to maintain its position while envious competitors resume their ad expansion, according to Shmulik.

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