MSFT, META & AMZN CapEx & AI ROI to Set Stock Market Tone

[00:00:00] Speaker 1: Welcome back. Time now for the Watchlist panel where we're taking a look at all the big tech earnings due out this week. It's going to be a very busy week ahead. Marina Lorena is with me, head of director of financial research at Domini Impact Investments and Nick Raich, CEO of the Earnings Scout. I'm so glad that you're both with us. Maria, you were looking and talking about the week ahead, AI infrastructure, CapEx build out, AI, how it's being adopted and implemented. What do you really, I mean, that's what you're listening for, but are you listening for something specific from any specific company? I mean, I get the trend. Are they spending more, right? [00:00:38] Marina Lorena: Yeah, I mean, to be honest, I think at Domini, that is the key thing that we're looking for. It's, you know, what are these companies going to say about their CapEx spend, about the outlook for the CapEx spend, and again, how AI is being adopted and implemented? Because the big question out there really is, are we going to see the return on this enormous amount of money that has been invested in AI so far? So really, those are the two critical questions that we will be looking for some measure of an answer on. [00:01:03] Speaker 1: But do you have a sort of feeling like good news, bad news? So if somebody says, oh, we spent more, we spent less, or, you know, we're implementing it in this way. I mean, are you, have you already sort of formulated a reaction? [00:01:17] Marina Lorena: Well, we, I mean, at Domini, we're most focused on these more infrastructure-type names, names that are tied to the electrification and the build-out around AI. So obviously, the CapEx spend is going to be important for us to be keeping an eye on. It was, I mean, the number effectively was positive last week from Google in that they are spending more. They've indicated that they're spending more. The market wasn't terribly enthusiastic about that, obviously, because there's a cash flow situation now that's being monitored. But broadly, it looks like AI moves forward. The build-out continues. And that's positive for a number of the stocks that we're watching in our portfolio. [00:01:54] Speaker 1: And for Google Alphabet, it had a backlog. I mean, it has demand, and that's why it's spending. I don't know what the right number is to spend. I mean, they upped that outlook on the projections of possibly even over $200 billion. Nick, what did you make of it? And you, too, are also watching. How much are they spending? The AI investments, are they needed? Why is it important here at this time? [00:02:19] Nick Raich: The sentiment Maria touched on is pretty negative because the market's focused on how much they're spending as opposed to how much they're making in earnings right now and what they're generating. So we follow the earnings at the Earnings Scout and believe that that's the trend and it remains positive. And once that overhang gets, when people have fears that the overspend is going to cause a collapse of some sort, because we had that in the late 90s, early 2000s with the telecom build-out laying too much fiber-optic lines, et cetera. And at some point, the build-out will be too much. But right now, we still think that engine's still going. And instead of focusing on the negative, the street should be focusing on the positive, and that's the strong earnings. [00:03:01] Speaker 1: I mean, you still think, and you were looking at the past few, we have, what, seven, this is now seven quarters of double-digit earnings growth. And so that's something you're focusing on. You're talking about the earnings momentum that's still accelerating, right, Nick? [00:03:17] Nick Raich: That's right. And we like to look forward instead of back. But this second quarter earnings season, we can say take it to the bank. It's going to be plus 20% growth again for the second consecutive quarter. You know, you're talking three and four times trend. But the more important thing is, you know, 137 companies in the S&P 500 have already reported, and half of them are raising their estimates. That's a higher-than-normal number, and it's better than three months ago when they reported their first quarter earnings. And the rate at which those estimates are going up after those 137 companies are reported is higher. So there is strong improvement in the outlooks, and that's persisting. And that's usually not the sign we get at market tops. So this is just fear right now driving. We think any kind of sell-offs is going to create dips for long-term investors to buy. [00:04:03] Speaker 1: And, Maria, will you be really concerned if you see knee-jerk reactions? For example, we saw that with Google. I mean, they were selling underway. Same with Tesla, too. But then we got good news from SAP. We have a new tech IPO in Asia that has brought optimism. So I know you're waiting to hear, and sometimes we have knee-jerk reactions, but you're really looking at the grid build-out, right? Utilities, renewables, all things that fuel these AI data centers. Can you elaborate more on the reshoring and the infrastructure investment? How big is it? [00:04:35] Marina Lorena: Yeah, I mean, I think that is the point. I think maybe the whole emphasis that has been put on the AI build-out so far, and, you know, to the detriment, maybe, or just to the neglect of the fact that reshoring continues, that the ongoing demand for power and electricity continues. I mean, I think the U.S. is expected to need 20% more electricity by the end of this decade. I mean, at Domini, where impact investors were focused on this topic, and we really believe that a lot of these contractors that have had their backlogs taken up with AI, there's still opportunity for them to grow in other areas, and that's key, I think. [00:05:12] Speaker 1: And then I'm thinking about Meta. I mean, Nick, you noted that Meta has to show that AI is improving, improving its business. How? Is it improving the advertising performance? What is it improving, right? Engagement. How are they using AI? You want to hear more about that. [00:05:30] Nick Raich: That's right, and they need to see that that improvement is greater than the cost of the spend on building out the infrastructure. So that's what the street wants to know, and we're going to see it reflected in the earnings revisions and the outlooks that a company provides after. That's why the outlook's the most important thing, not so much what Meta reports about what just happened over the last three months end of June. So we want to look at that forward guidance and see if that's still improving or not, and that's what we're going to look at, is the spending worth it. And fear right now is that people are worried that the hyperscalers are not going to get the return on invested capital on this. I get it as a legitimate fear, but as long as we see strong revenues and earnings expectations improving, that's just a fear and not reality at this point. [00:06:16] Speaker 1: There's also concern just about the fact that you have rising bond yields, the two-year, for example, something Jessica Inskip was telling me about today. She was looking at the SOX and the SMH and the elevated levels there, and I was looking at the SMH with Jay Woods, and he was saying, look, it's up 55% year-to-date. I mean, he's keeping an eye on names like KLA and LAM and Qualcomm. We're here from Qualcomm this week for sure. I mean, you know, what needs to happen for one thing to happen versus the other? AI, can it go forward? Can the market grow? Can these numbers grow if you still have rising bond yields and or other areas? [00:06:51] Marina Lorena: Yeah, I mean, obviously, this is a very, very big week. There's just a lot going on between all of these earnings and with the Fed meeting as well this week. So a lot of unknowns. But for sure, I think we'll certainly know more by the end of this week on all of those topics. [00:07:07] Speaker 1: I know. We'll have to have something to sink our teeth into at this moment. We're very much in a wait and see mode. Maria Lorena and Nick Reich, thank you both so much for being with us here. [00:07:21] Speaker ?: Maria Lorena and Nick Reich, thank you for being with us here. Maria Lorena and Nick Reich, thank you for being with us here.