Wall Street Strategists See AI Investment Paying Off

With stocks back at all-time highs, Wall Street strategists are pointing to signs that the massive spending on artificial intelligence (AI) by Big Tech companies is finally starting to pay off. The megacap hyperscalers and their booming cloud businesses are driving this trend, with experts predicting strong earnings and revenue growth in the coming quarters.

Keith Lerner, chief investment officer at Truist, told Yahoo Finance that ‘we are seeing signs that the spending is leading to earnings.’ JPMorgan analysts have also lifted their price target on the S&P 500 to 8,000 from 7,800 last week, citing strong demand for cloud computing and upward guidance revisions.

Microsoft, which saw record cloud revenue last quarter, anticipates further acceleration this quarter. Amazon’s AWS growth hit 36.7% in the quarter, its fastest in 18 quarters. Alphabet has also seen explosive growth in its cloud business, while even Meta is weighing renting out some of its computing power.

Although free cash flow is expected to remain negative in FY27 for most hyperscalers, the business they have lined up is growing faster than their spending, a sign that demand is starting to catch up with all that capital expenditure, said JPMorgan strategist Dubravko Lakos-Bujas.

Cloud computing backlogs now exceed a whopping $2.3 trillion, up 16% from the first quarter, according to Bank of America research. All of those commitments will require more investments, with Alphabet, Amazon, Microsoft, and Meta collectively projected to allocate roughly $725 billion to $760 billion to capital expenditures this year to help build AI.

Tom Essaye, founder of Sevens Report Research, told Yahoo Finance that ‘I love cloud right now because I think the cloud capacity is … the next bottleneck that has to be resolved in this AI data build-out after semiconductors and memory.’ He ranked Google, Amazon, and then Microsoft as his top stock picks, citing the risk in Microsoft’s Office software segment.

Even hiccups from router giant Cisco and chipmaker Cerebras last week weren’t enough to derail the AI theme. ‘The market has this expectation for explosive growth. And very good is not good enough,’ Defiance ETFs chief investment officer Sylvia Jablonski told Yahoo Finance.

Truist’s Lerner said tech and AI will continue to be the trades to watch for the rest of the year. He advises his clients to stay Overweight in tech, though he sees other areas of the market that can help balance a portfolio, including Healthcare and Financial Services.