Big Tech AI Spending Fuels Earnings Growth, Strategists Say

Wall Street strategists are identifying a payoff from substantial investments in artificial intelligence, with spending now directly contributing to earnings for major technology firms. The surge in demand for cloud services, driven by AI build-outs, is leading to accelerated growth and expanding backlogs for hyperscalers.

Analysts at JPMorgan have raised their price target for the S&P 500 to 8,000, citing not only robust earnings and upward guidance but also strong demand for cloud computing. Microsoft has reported record cloud revenue, with its Azure business surpassing $100 billion in annual sales. Amazon's AWS experienced its fastest growth in 18 quarters, reaching 36.7%, and Alphabet's cloud division has also seen significant expansion.

Cloud computing backlogs among the top four providers now exceed $2.3 trillion, an increase of 16% from the first quarter, according to Bank of America. Despite projected negative free cash flow for most hyperscalers in FY27, the growth in secured business is outpacing expenditures. This dynamic suggests that monetization may ramp up faster than spending, supporting future revenue growth and alleviating concerns about return on invested capital.

Strategists emphasize that cloud capacity is becoming a critical bottleneck in the AI data build-out, following semiconductors and memory. While companies like Cisco and Cerebras have faced headwinds, the overarching AI theme remains strong. Truist's chief investment officer advises an Overweight position in technology stocks, noting that while AI remains a key trade, sectors like Healthcare and Financial Services can offer portfolio diversification.