Wall Street will need strong earnings to shake off recent market jitters around AI.
This season is expected to mark the second consecutive quarter of 20%-plus earnings growth for the S&P 500 (^GSPC), with the AI trade driving much of that momentum.
“The bar is pretty high,” Sylvia Jablonski, Defiance ETFs chief investment officer, told Yahoo Finance this past week.
The artificial intelligence trade has taken some hits over the past week, with semiconductor stocks declining further into bear-market territory following their parabolic rally this year.
Over the past five sessions, memory chip highfliers Micron Technology (MU) and SanDisk (SNDK) have dropped more than 10% and 25%, respectively.
“The golden child of this AI revolution, over the last few months, is memory stocks,” Yorkville Ives partner Dan Ives told Yahoo Finance.
“We’re going to go through these rotations in this AI revolution as it plays out,” he added. “It comes down to earnings season. You have to show the monetization piece, because right now it’s just capex.”
Hyperscalers are set to spend a collective $650 billion on AI infrastructure this year. As earnings season picks up, investors are looking for evidence of a return on those investments. Alphabet (GOOGL, GOOG) will be the first of the Big Tech players to report on Wednesday.
“Their earnings need to be strong,” Principal Asset Management chief global strategist Seema Shah said of the hyperscalers. “They are really the foundation for the entire AI ecosystem.”
Concerns over rising capital expenditures have rippled through the AI trade. Taiwan Semiconductor Manufacturing (TSM) stock moved lower last week after it raised its capital spending plans to expand capacity, partly due to rising equipment costs.
However, the world’s largest contract chipmaker also hiked its revenue guidance due to strong demand. Equipment supplier ASML (ASML) likewise issued a bullish forecast as chipmakers continue buying its advanced equipment.
“I think it’s a real vote of confidence for the AI trade,” said Defiance’s Jablonski, who added that AI represents a multitrillion-dollar addressable market.
But not all tech is benefiting from the boom. IBM (IBM) shares suffered their steepest decline in decades after the company warned that enterprise clients are prioritizing spending on memory and AI infrastructure over mainframe computers and traditional software.
On the other hand, cybersecurity stocks got a boost after IBM noted that clients are focusing on security concerns amid surging use of agentic AI.
