AI spending is accelerating at an increasingly fierce pace, and the market's patience is wearing thin.

Original Author: Zhang Yaqi

Original Source: Wall Street Sights

The AI arms race among tech giants is facing the ultimate test of investor patience. Microsoft, Meta, and Amazon are releasing their quarterly earnings this week, and the market's focus has shifted from revenue growth to a more fundamental question: When will the ever-expanding capital expenditures finally deliver returns?

The backdrop for this test is a cautionary tale from Alphabet just last week. The company reported its highest-ever quarterly profit of $112.1 billion, but its stock price promptly fell over 7%—because investors were alarmed by the company's decision to raise its 2026 capital expenditure forecast by $15 billion.

Total combined capital expenditures for Alphabet, Microsoft, Meta, and Amazon are expected to hit $700 billion this year, with Wall Street predicting that figure could surpass $1 trillion by 2027.

This market fragility sets the stage for the earnings season of these three companies this week. According to Bloomberg, citing UBS Global Wealth Management, "Limited visibility on capex beyond 2027, coupled with increased investor demand for spending discipline, could continue to weigh on risk appetite." Meanwhile, Moody's, a Fitch Ratings affiliate, warned last week that sustained capital spending plans could "threaten credit quality," as the six major tech companies collectively hold approximately $460 billion in direct debt.

Microsoft: Azure Momentum Strong, Copilot Monetization Enters New Phase

Among the three companies, Microsoft faces perhaps the most clearly defined expectation pressures. Analysts expect Microsoft's capital expenditures to surge 74% year-over-year this quarter. At the same time, the market holds high expectations for Azure cloud services growth.

According to a Morgan Stanley research report, the firm's analysts are confident that Microsoft will achieve approximately 41% constant currency growth for Azure in its fourth fiscal quarter, about 1 percentage point above the high end of management's guidance of 39% to 40%. Morgan Stanley's confidence stems from positive feedback from channel partners, improving GPU supply capabilities, and the results of their own CIO survey—in cloud migration scenarios, 72% of CIOs expect to increase spending on Microsoft solutions over the next year, with Microsoft leading all vendors in expected incremental IT budget capture.

Commercialization progress for Copilot is also under the spotlight. In the third fiscal quarter, paid seats for Microsoft M365 Copilot grew from 15 million to 20 million, with management guiding for a continued sequential increase in net paid seat additions. Morgan Stanley notes that Copilot's monetization path is evolving into three parallel growth drivers: direct seat sales, user migration to the higher-value E7 subscription tier, and consumption-based AI service pricing. Notably, the price increase for Microsoft's commercial M365 took effect for new customers on July 1, 2026. Morgan Stanley estimates this pricing adjustment will contribute roughly $2 billion, $4 billion, and $6 billion in incremental revenue in FY27, FY28, and FY29, respectively.

Regarding capital expenditures, Morgan Stanley believes street estimates remain conservative and have room for upward revision. Management previously disclosed that calendar year 2026 capital expenditures are expected to be around $190 billion, with approximately $25 billion of that coming from component price increases. The firm maintains an "Overweight" rating on Microsoft with a price target of $600, arguing that the current forward P/E multiple of approximately 16x for FY28 is "too cheap," failing to fully reflect the company's continued high-growth potential.

Meta: Under User Growth Plateau Pressure, Capex May Be Raised Significantly Again

Meta's situation is more complex. According to Bloomberg citing Bloomberg Intelligence (BI) analysis, Meta may "significantly" raise its capital expenditure guidance to cope with pressure from rising component costs—precisely the core trigger for Alphabet's stock decline last week.

Meanwhile, user growth faces new pressures from the regulatory front. As regulators worldwide push forward legislation to restrict social media use among teenagers, Meta's user growth outlook is set to face greater strain. The metric used to measure daily active users across its four core products, known as "Family Daily Active People," is expected to record its weakest growth performance since 2021.

Amazon: AWS Growth May Hit a New High Since 2022

Compared to Microsoft and Meta, market expectations for Amazon's upcoming earnings report appear more optimistic. According to Bloomberg citing Truist analysis, Amazon's overall revenue growth could reach 17%, the highest in nearly five years; Amazon Web Services (AWS) growth is expected to surpass 30%, marking its highest level since 2022. Robust demand for AI-related services is seen as the core driver of AWS growth.

However, Amazon also faces questions regarding its capital expenditure. Following Alphabet's stock decline triggered by its raised spending forecast, investors remain highly vigilant about whether the three companies will further increase their capex outlooks for 2027 and beyond.

Fitch Warning: Balance Sheets Under Pressure, Credit Risks Emerging

Moody's research report released last week set a somber tone for this earnings season. The agency pointed out that Alphabet, Microsoft, Amazon, Meta, Oracle, and CoreWeave are transitioning from an asset-light model based on software, intellectual property, and cloud services, to an asset-heavy model requiring an "unprecedented scale of investment." This trend could put pressure on the credit metrics of these companies.

In a Moody's podcast, Vice President Kevin McNeil stated: "These are large, well-established companies with balance sheets that in many cases are pristine, but they are embarking on what is almost an unprecedented level of capital spending. The increased capital intensity could potentially cause free cash flow to turn negative for some companies, or at least contract significantly." He further pointed out that debt financing "could push leverage higher and introduce additional risk to the balance sheet."

Among the six companies under scrutiny, Oracle is in the most vulnerable position. Moody's has revised its credit rating outlook for Oracle to negative, placing its Baa2 rating just two notches above junk status. Last month, another rating agency, S&P Global, also downgraded Oracle to just one notch above investment grade. In contrast, Alphabet, Amazon, Meta, and Microsoft still maintain solid balance sheets, with their investment-grade ratings secure for the foreseeable future.

Bulls vs. Bears: Will AI Investments Finally Pay Off, or Mortgage the Future?

Faced with continuously expanding capital expenditures, clear divergence has formed within the market. The core logic for the bulls is that demand is real, and the limiting factor for growth is supply, not demand. Taking Azure as an example, Morgan Stanley notes that Microsoft CFO Amy Hood clearly stated in last quarter's earnings call that Azure's guidance is essentially an "allocated capacity guide," with the constraint on growth coming from data center construction timelines and GPU deployment schedules, not customer demand. As Microsoft plans to double its total data center capacity over the next two years, this constraint is expected to gradually ease.

Bears, however, focus on the lack of return visibility. UBS Global Wealth Management points out that "limited visibility on capex beyond 2027" is a key factor suppressing investor risk appetite. Moody's warning is more direct: the shift from an asset-light to an asset-heavy model is eroding the high free cash flow advantages these companies have historically prided themselves on.

For long-term investors, UBS still recommends holding positions: "For long-term investors with diversified portfolios, maintaining investment is the most effective strategy to navigate current uncertainties. Given robust earnings growth and an improving cyclical backdrop, attractive stock opportunities exist across sectors and regions." However, with Alphabet's experience as a recent precedent, the market's judgment is clear: Good earnings aren't enough; you also need to keep a tight rein on spending.