Q3 Tech Earnings Preview: All Eyes on AI Spending

A few years ago, info tech firms often faced concerns on Wall Street about spending too much. Now, it's the opposite. As major names like Microsoft (MSFT), Apple (AAPL), and IBM (IBM) line up to report, investors appear to want heavy spending to roll on, keeping the AI euphoria bubbling. At the same time, the tech sector faces new tariff concerns ahead of third-quarter earnings, leaving investors wondering how a potential longer-term spat with China might hurt businesses.

As the heaviest hitters step up to the earnings plate, many investors will focus more closely than ever on capital expenditures, seeking possible cracks in the AI armor that might hint at a spending top. Debate swirls about whether AI is in its "second inning" or "seventh-inning stretch." Currently, AI is on the pitcher's mound hurling new products at the tech sector, which has swung at every pitch for years.

Earnings season could help investors learn if the tech batter is about to call time out or even getting ready to step out of the box, which seems unlikely given all the recent AI deal-making. And in this case, "tech" means the traditional non-chipmaker tech stocks caught up in the AI frenzy. This includes Amazon (AMZN), Tesla (TSLA), Alphabet (GOOGL), and Meta Platforms (META), which aren't in the S&P 500 tech sector but have a huge impact with their cloud and EV offerings.

"We're still in the mode where we want to see capital spending go up because it signals to the market that we're still in the early innings on the AI-investment binge," said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. "So, if there's any stutter, that could give investors pause."

As earnings approach, keep in mind what the mega-caps' forecast from a spending perspective was last time they reported. Any material change, especially downward, might hurt the sector or even pull the entire market lower.

Here's what the largest "hyperscaler" cloud companies said about capital spending last quarter:

• Microsoft: Capital expenditures will grow in the new fiscal year but more slowly than in the 2025 fiscal year that ended in June.
• Alphabet: Capital expenditures for 2025 will be $85 billion, up $10 billion from February, due to "strong and growing demand for our Cloud products and services."
• Meta Platforms: 2025 capital expenditures will come in between $66 billion and $72 billion, above the low end of the company's previous estimate of between $64 billion and $72 billion.
• Amazon: The company plans to spend as much as $100 billion this year on AI as it builds data centers and software.

Keep that as a cheat sheet when these companies report October 29 and 30. Apple, which has been slower on the AI spending path, reports October 30.

The markets are also sensitive to valuations in tech, which are near the high end of the 10-year range for most of the biggest mega-cap firms. This likely won't trouble investors if companies can continue to grow revenue double-digits and surpass guidance expectations. But mega-caps face tougher comparisons to year-ago results each quarter, making it more challenging to deliver results like Microsoft's 18% year-over-year revenue growth in its last quarter. AI-related demand has driven multiple expansion.

"Expectations are high going into the quarter across the board," Peterson said, meaning general optimism around tech results. "Mega-caps appear poised to beat expectations, given the flurry of deal headlines, but it matters by how much, along with guidance and capital expenditure plans."

The deals Peterson referred to were a swirl of announcements over the last month related to partnerships on AI, many of them with privately held OpenAI. Tech shares skidded slightly in early October on concerns that some of these deals were "circular" in nature, meaning it appeared that in some cases companies were in essence lending money to customers to buy their products or services.

The questions each company faces are how much can they beat the average Wall Street earnings guess by, and what percentage of beat the market considers good enough to keep supporting their stock prices. At times, including last quarter, even solid earnings "beats" by big-tech firms weren't enough to excite the market.

Microsoft shares spiked following its earnings report in late July that included 26% growth in the firm's Intelligent Cloud unit and better-than-expected overall results. However, since closing above $530 on July 31, shares fell to under $520 by mid-October and at one point fell below $500. This reinforces notions that investors expect a lot and won't necessarily stay enthusiastic even when earnings and guidance top estimates.

Trade concerns are back, muddying the waters ahead of a November 10 deadline for an extension of the three-month U.S. tariff deadline. China recently clamped down on rare earth exports, a knotty problem for many tech firms, and copper prices topped $5 per pound again, a possible supply-chain challenge. Then China and the United States upped the ante with new port fees and other moves that upset the market in mid-October. Presidents Trump and Xi, who traded accusations, are expected to possibly meet around the time most of the big tech firms report later this month, which might soothe concerns stemming from Trump's October 10 threat of "massive" tariffs.

While the tariff war centers on semiconductors, China is a major source of production for Apple and Amazon, though both are trying to spread their sourcing and factory footprints.

Tariffs aside, earnings season approaches with less focus on the perceived return on investment (ROI) from AI. The heavy spending by mega-caps is all about building their respective AI capabilities, and until recently, they faced many questions about the payoff.

"The ROI on AI has been put to bed a bit because the results have been exceptional," Peterson said. "They've delivered the results you want to see if they expect AI investment to translate into higher growth. Insatiable demand for computing power doesn't appear to show any signs of slowing."

That said, there are specific cases, some recent, when ROI did get called into question, just not for the largest of the large. Shares of Oracle (ORCL) dove earlier this month on a news report that questioned its margins on AI. But shares quickly bounced back.

If some firms don't deliver results from AI that meet market expectations, that could ultimately be a headwind, but it doesn't appear to be for now.

"The market has been in this mode where it parallels the AI-infrastructure build-out to 1998 or 1999," Peterson said, referring to the late-90's internet-driven rally that topped in early 2000. "People are taking the risk of buying at the top because it's a MOMO/FOMO moment that's feeding on itself." MOMO refers to persistent upside momentum, and FOMO is the "fear of missing out" on potential gains.

So far, data center firms seem convinced they must keep growing their infrastructure to keep up with their competitors, but the impact could end up hurting bottom-line growth. Keep in mind that some of the heavy spending on data centers depends on resilience in the advertising businesses of companies like Meta and Alphabet. If a slower economy or AI competition hurts ad demand, that could ultimately take a bite out of AI capital expenditures by those firms and likely filter down into AI-chip market growth.

Consensus is for the S&P 500^® information technology sector to post third-quarter earnings growth of 20.9%, though to a large extent that reflects the chip element of the sector, according to FactSet. Earnings strength earlier this year—especially for consumer-facing firms like Apple and Amazon—may have reflected some "pull forward" buying done ahead of tariffs, but the expected net profit margin of 26.6% for the sector supports bullish earnings expectations.

Third-quarter info tech sector revenue growth is seen at 14.2%. For the full year, consensus is for 20.7% info tech earnings growth, just below 21.5% in 2024. This likely reflects both tough comparisons and the "law of large numbers" that makes it difficult for companies to build on already massive growth.

AI is the main story, but that's closely wrapped up in the cloud business as major firms like Alphabet, Amazon, Meta, and Microsoft incorporate AI capabilities into their cloud offerings. That's causing most of the big spending, so results from these firms could give investors a better sense of semiconductor business trends that could affect shares of Nvidia (NVDA) and other chip firms.

Investors are also watching margins to see if tariffs start to hurt profits. Some tech companies said last quarter that customers are putting off projects during the tariff uncertainty, so that's another thing to listen for on earnings calls.

Also, Apple's early iPhone 17 sales appeared strong, lifting shares to new all-time highs in mid-October, though Apple still trails many other large tech firms this year in stock price growth. Data from Counterpoint Research says the iPhone 17 outsold the iPhone 16 by 14% during its first 10 days of availability in the United States and China, Briefing.com noted last week.

Besides tariffs' potential impact and company spending trends, here are three things to watch as tech firms report:

1. Sunnier cloud sector? The cloud market slowed late last year but gained firmer footing in the first half. The exception appears to be Amazon Web Services (AWS), the biggest cloud business. Its 18% revenue growth in the second quarter was up sequentially but behind Alphabet's 32% year-over-year cloud growth and Microsoft's 26%, implying that Microsoft and Alphabet are gaining a footing. Oracle, a smaller cloud player, also might be nibbling at the heels of competitors. Those big-three cloud companies face high expectations for the coming quarters, and they'll be watched closely by tech investors, who've hitched a ride on chip stocks like Nvidia, Advanced Micro Devices (AMD), and Broadcom (AVGO) that tend to be the beneficiaries of data-center spending. The highly publicized October 20 AWS outage didn't help matters for Amazon from an optics standpoint.
2. Howdy pardner! The last few months featured feverish activity as firms like Tesla (TSLA), Nvidia, Oracle, and AMD sought AI-related partnerships. OpenAI—which according to analysts now has a value of around $1 trillion but isn't publicly traded—appeared to get the lion's share of partnering interest. This has led to concerns of "circular" trends forming in which companies give money to OpenAI, which then spends it buying their donor's chips. Investors will be listening for news of new partnerships or expected benefits of existing ones on companies' earnings calls.
3. Hard times for software: Companies like Adobe (ADBE), Workday (WDAY), and Salesforce (CRM) have seen shares struggle amid ideas that software might not be as heavily affected by tariffs as many chip and cloud firms. Salesforce—which next reports in December—made headlines in mid-October by saying it's deepened its partnership with OpenAI to help generate content and analyze data. And Adobe, which reported in September, said at the time it's made AI inroads and also raised its digital media business revenue guidance. IBM saw its revenue and gross margin in software miss Wall Street's consensus in the second quarter.

For the major tech firms reporting this week, analysts expect the following:

• MSFT: Reporting October 29 after close. EPS of $3.67, +11.2% year over year, on revenue of $75.3 billion, +14.8% year over year.
• META: Reporting October 29 after close. EPS of $6.69, +10.9% year over year, on revenue of $49.4 billion, +21.7% year over year.
• GOOGL: Reporting October 29 after close. EPS of $2.27, +7.1% year over year, on revenue of $99.9 billion, +13.1% year over year.
• AAPL: Reporting October 30 after close. EPS of $1.77, +7.9% from a year earlier, on revenue of $102.1 billion, +7.6% year over year
• AMZN: Reporting October 30 after close. EPS of $1.58, +10.5% year over year, on revenue of $177.7 billion, +11.8% year over year.