Is the massive capital investment in the artificial intelligence arena a pure “money-burning” exercise, or a “sowing” of long-term value for the future? The market has given a phased answer in just two weeks. The latest earnings reports from Microsoft (MSFT) and Amazon (AMZN) acted like a shot of adrenaline, completely reversing the previously pervasive market sentiment of “AI bubble bursting,” staging a dramatic turnaround of “the king of tech stocks returns.”
In the six trading days since Microsoft released its earnings on July 29, its stock price surged, fully recovering its year-to-date losses and turning to a 3.4% gain; Amazon’s stock price also rose sharply in tandem, with its year-to-date gain reaching 18%. The combined market value of the two companies increased by 1.3 trillion U.S. dollars. Arup Datta, an investment manager at McKenzie who holds positions in both companies, remarked that the current market rotation is extremely fast, sentiment is highly volatile, and at times even overreacts.
The core catalyst for this sentiment reversal was precisely the cloud business performance of the two giants. Microsoft’s Azure cloud revenue grew 43% year-over-year in the fourth fiscal quarter, hitting a new high in recent years; Amazon’s AWS cloud business revenue jumped 37% year-over-year in the second quarter, marking five consecutive quarters of accelerating growth. The impressive cloud growth data prompted investors to reassess the giants’ hefty artificial intelligence capital expenditures. Tom Plumb, president of Wisconsin Capital Management, pointed out that the market is gradually reaching a consensus that the investment logic of leading tech companies is clear, and that the current return expectations from cloud businesses are sufficient to cover short-term input costs. The market’s ambivalent attitude toward capital expenditures was particularly evident in Alphabet (GOOGL), whose strong cloud performance was overshadowed by high spending, causing its stock to fall sharply at one point, though it subsequently rebounded, and the stock remains up over 14% year-to-date.
This rebound was not driven solely by earnings catalysts, but was the result of multiple factors converging. First, the deep decline in valuations earlier created room for a rebound. Before the earnings releases, the forward price-to-earnings ratios of both Microsoft and Amazon fell to roughly the same level as the S&P 500, well below their five-year averages, highlighting their valuation appeal. Second, the passive liquidation of highly leveraged funds completed the clearing of negative factors. The sell-off in artificial intelligence-related holdings triggered earlier by a fund under Leopold Aschenbrenner came to a temporary halt after the Nasdaq 100 fell 11% from its June peak, removing obstacles to the market rebound. Finally, the phased easing of macroeconomic risks and the overall improvement in market risk appetite jointly contributed to this strong recovery.
However, not everyone feels at ease with this rebound. Michael O’Rourke, chief market strategist at Jonestrading, believes that the phenomenon where all gains are completed within a few days is not healthy market behavior, but rather resembles a bear-market rally driven by quantitative funds, passive indexes, and options speculation. He also emphasized that the core negative factors that previously weighed on tech stocks—massive capital expenditures and free cash flow pressure—actually still exist, with the only difference being that cloud revenue has partially validated the rationality of those expenditures. In the short term, the strong growth in cloud businesses provides data support for artificial intelligence investments, but whether the market can transition from a “sharp surge” to a “steady climb” will still require sustained validation from earnings in more quarters to come. This journey of “self-proving” for the tech giants may have only just begun.
