Key points
US earnings season is in full swing, and corporate America is delivering.
Roughly half of the companies in the S&P 500 have officially reported their earnings with the index on track for a third straight quarter of 25%+ earnings growth.
While much of this growth remains narrow, led by energy and semiconductors, recent market performance has started to broaden with the S&P 500 Equal Weight index outperforming its market cap counterpart by 3.3% this month1.
Part of that reflects growing scrutiny of how the AI build-out is being funded, which has weighed on AI names with weaker balance sheets. Even the megacaps haven’t been spared with markets now questioning whether there is a credible path for free cash flow recovery amid a capex bill set to total more than US$1 trillion next year.
SpaceX (20 October)
- SpaceX impressed in its latest print, with revenue more than doubling2 and shares up 7.8% the day after reporting.
- Its AI business, Super Intelligence, now contributes more than half of revenue, but that growth is capital hungry and accounts for the bulk of group capex.3
- Starlink remains the profit engine.
Meta (21 October)
- Meta beat expectations and guided robustly for Q4, though shares still fell 7% the following day as investors weighed the cost of its AI ambitions.
- While revenue rose 26% year-over-year (YoY) to US$64.6bn, massive capex outlays outstripped operating cash flow, pushing free cash flows into negative territory.4
- Higher ad volumes and pricing are still providing clear evidence that AI is feeding into earnings.
Tesla (21 October)
- Tesla dipped ~1% after trimming capex guidance on a potentially slower ramp for Optimus and Cybercab.
- Management now expects 2026 capex of around US$20bn, down from more than US$25bn previously.5 Revenue was flat YoY at US$28.0bn, while operating income fell as spending on AI and Optimus grew faster than gross profit.6
- Free cash flow of US$1.5bn was better than expected, though flattered by the lower capex.7
Microsoft and Alphabet (28 October)
Shares in Microsoft and Alphabet diverged significantly in after-hours trading, highlighting growing scrutiny of how big tech companies are funding their ambitious data centre build-outs.
On the surface however, their headline results were encouraging particularly within cloud services. Microsoft’s Azure accelerated 48% to US$33.2bn8 while Google Cloud revenue rose 103% YoY to US$30.7bn and expanded operating margins to 36.2% from 23.7% a year earlier.9 Other milestones signal the demand for AI remains structurally strong with Microsoft’s commercial remaining performance obligations up 73% to US$677bn and Alphabet’s Gemini app reaching one billion users.10
But the mixed share price reaction can be attributed to the market’s focus on balance sheet strength, cash flows and leverage in a world of higher interest rates.
Microsoft kept free cash flow positive despite capex rising and expects to remain free cash flow positive through fiscal 2027.11 By contrast, Alphabet’s capital expenditure more than doubled, and free cash flow was negative for the second consecutive quarter.12
The key question is whether Alphabet’s 2027 capex, which management expects to increase significantly, converts into Cloud revenue fast enough to bring free cash flow back into positive territory.13
Amazon (29 October)
- Amazon fell ~5% after hours, and the pattern from Alphabet repeated whereby strong cloud revenue growth was overshadowed by negative free cash flows.
- AWS growth accelerated to 39%, its fastest pace in nearly five years and management expects growth to exceed 40% in both 2027 and 2028.14
- However, results narrowly missed expectations, with e-commerce and advertising softened partly by a Prime Day timing shift, while trailing 12-month free cash flow deepened to a US$42.4bn outflow and capex guidance was held at ~US$220bn.15
Outlook
With all three cloud hyperscalers having now reported, the message is consistent. AI demand remains undoubtedly strong, but the market is rewarding those that can fund it from internally generated cash flows. Expectations of further Fed tightening will likely sharpen this focus on financing as higher rates raise the cost of debt-funded build outs.
Nvidia, expected to report on 17 November, is the next major test of whether hyperscaler spending is still flowing through the AI supply chain. In our view, the market has moved from indiscriminately rewarding AI spending to scrutinising how it is financed, and how long it takes to show up in cash. All in all, this season reinforces a diversified approach to US tech as single stock volatility around earnings releases has become a common theme in recent quarters.
