Wednesday’s earnings scoreboard, before the big two reported, already told a story, and after the close that story split in two. Microsoft and Alphabet, reporting after the bell, produced opposite verdicts on artificial intelligence spending. Microsoft gained about 4 percent after reporting revenue of 92.3 billion dollars against 90.7 billion expected, earnings per share of 4.89 against 4.73 expected, and Azure growth of 48 percent. Alphabet fell about 10 percent after reporting revenue of 127.6 billion against 128.2 billion expected, earnings per share of 2.67 against 3.02 expected, and capital spending of 51.4 billion dollars that pushed free cash flow to negative 9.1 billion.
Earlier in the day, the scoreboard had its own winners. Vertiv led Wednesday’s gainers with a 16.6 percent advance after stronger orders and guidance, a reminder that the AI infrastructure trade is not only about the largest companies. Chip stocks rose on SK Hynix’s record profits, with revenue up 328 percent, lifting Samsung and Micron. Oracle gained about 11 percent after hours on its own results. The pattern across those names is consistent: companies that show spending turning into orders, revenue and cash are rewarded, while companies whose spending runs ahead of returns are punished, however strong their growth headline looks.
The Fed in the background
The Federal Reserve’s decision to hold rates at 3.75 percent to 4.00 percent, in a 10-2 vote with two dissents for a hike, provided the background for the whole session. Stocks closed higher, with the S and P 500 up 0.28 percent to 7,743.98, the Nasdaq up 0.27 percent to 26,549.85 and the Dow up 0.19 percent to 52,475.10, while the 10 year Treasury yield jumped to 5.050 percent. Wednesday’s market wrap captured both halves: new highs on the Fed hold, and a sharp after hours split on earnings.
Thursday brings the next test: GDP, PCE inflation and jobless claims in the morning, a European Central Bank decision, and Amazon, Intel, Sandisk and Gilead after the close. Amazon’s result, in particular, will show whether the Microsoft pattern or the Alphabet pattern is the norm for AI spending this quarter. Until then, Wednesday’s scoreboard stands as a warning: in this earnings season, beating expectations is not enough. Converting spending into cash is the test, and only some companies passed it.
What investors should take away
The takeaway is not to avoid AI stocks, but to distinguish between them. A company that grows its cloud by 103 percent, as Google Cloud did, and still falls 10 percent, is telling investors that growth without cash flow is no longer sufficient. A company that grows by 48 percent, as Azure did, and rises, is telling investors that profitable growth still commands a premium. That distinction, between growth and profitable growth, will govern the rest of the earnings season, and it is the most useful lesson of Wednesday’s scoreboard.
