'Spending is leading to earnings': Wall Street strategists see payoff from Big Tech's AI investment

Wall Street strategists are observing signs that the substantial investments in artificial intelligence by major technology companies are beginning to yield positive results, particularly for the dominant hyperscalers and their thriving cloud divisions. Keith Lerner, chief investment officer at Truist, commented on this trend, stating that they are witnessing evidence that the spending on AI is translating into earnings.

JPMorgan analysts have raised their price target for the S&P 500 to 8,000 from 7,800, attributing this optimism to robust earnings, revised upward guidance, and robust demand for cloud services. Microsoft's cloud revenue reached a record high last quarter, with Azure sales crossing the $100 billion mark for the first time. The company projects further growth in this area for the upcoming quarter.

Amazon's AWS saw a remarkable 36.7% increase in growth over the past quarter, marking its fastest growth rate in 18 quarters. Alphabet's cloud business has also experienced explosive expansion. Meta is exploring the possibility of renting out some of its computing resources. Despite the expectation of negative free cash flow for most hyperscalers in the fiscal year 2027, their planned investments are growing faster than their spending, indicating that demand is finally catching up with the capital expenditure, according to JPMorgan strategist Dubravko Lakos-Bujas.

The backlog of cloud computing commitments now exceeds an impressive $2.3 trillion, a 16% increase from the first quarter. The four leading cloud service providers - Alphabet, Amazon, Microsoft, and Meta - are collectively set to allocate between $725 billion and $760 billion to capital expenditures this year to support AI development.

Tom Essaye, founder of Sevens Report Research, believes that cloud computing is the next bottleneck in the AI data infrastructure, following semiconductors and memory. He ranks Google, Amazon, and Microsoft as his top three stock picks, with Microsoft trailing due to risks in its Office software sector. Even minor setbacks, such as those faced by Cisco and chipmaker Cerebras, have not deterred the AI investment theme.

The market is anticipating remarkable growth, and Defiance ETFs chief investment officer Sylvia Jablonski emphasized that tech and AI will continue to be the key areas to watch throughout the year. Truist's Lerner recommends an Overweight stance in tech, while also suggesting diversification into healthcare (XLV) and financial services (XLF) to balance client portfolios. Ines Ferre is a senior business reporter for Yahoo Finance.