US markets rotate as AI spenders lose half-trillion dollars to suppliers
Wall Street shifts focus from big tech spenders to infrastructure suppliers, with the S&P 500 remaining flat as losses in the Magnificent Seven are offset by gains in other sectors
US technology stocks experienced a significant rotation this week as investor concerns regarding the sustainability of massive artificial intelligence capital expenditure outweighed strong earnings reports. Major spenders, including Alphabet and Tesla, saw sharp declines in share price despite robust financial results. Alphabet’s stock fell 8% after capital spending doubled to nearly $45 billion, resulting in negative free cash flow for the first time. Tesla’s shares dropped 18% due to contracting operating margins. Conversely, suppliers benefiting from the AI infrastructure build-out, such as Supermicro Computer and Digital Realty, recorded substantial gains. The broader S&P 500 index remained largely flat, with losses in the "Magnificent Seven" offset by gains in other sectors.
Alphabet reported revenue growth of 24% and a 82% increase in its cloud business, yet the stock shed approximately $330 billion in market value. The decline was driven by capital spending that doubled to nearly $45 billion, outrunning cash inflows and pushing free cash flow below zero for the first time as a public company. Management raised spending plans for future years and declined to specify the upper limit of spending for 2027, prompting the market to penalise the valuation despite the operational success.
Tesla faced a different set of pressures, with revenue beating expectations but operating margins contracting to 1.4% from 4.1% a year ago. The shares lost 18%, representing a loss of about $250 billion, marking the company's worst week since 2022. The market treated both companies similarly, punishing Alphabet for excessive spending and Tesla for insufficient profitability, resulting in a combined loss of roughly half a trillion dollars in market value for the two firms.
In contrast, suppliers benefiting from the AI build-out saw significant gains. Supermicro Computer disclosed more than $60 billion in new orders in a single quarter, leading to a 25% rise in its share price. Digital Realty reported a record leasing backlog and raised its own spending plans without facing market punishment, attributed to its build-out being already leased. A basket of firms these tech giants buy from, including memory makers and data center landlords, rose an average of 11%, while Microsoft, Meta, Amazon, and Alphabet fell an average of 9%.
Chip stocks remain nearly 20% below their June record, despite the recent rebound. Nvidia gained 2%, adding roughly $100 billion in market value, while Amazon shares rose 31.9% in a month following fourth-quarter fiscal 2025 results showing $213.4 billion in revenue. The broader market saw roughly $880 billion leave the Magnificent Seven while the rest of the S&P 500 gained about $165 billion, leaving the index close to flat. The next earnings reports from Microsoft, Meta, Amazon, and Apple will provide further insight into whether this rotation continues.
