Blowout earnings from Big Tech firms for the second quarter (Q2) offer some validation for the years of heavy investment these companies have made in artificial intelligence (AI). Amazon, Apple, Meta, and Microsoft all reported strong results this week that indicate that AI could be a formidable engine for earnings growth in upcoming quarters.
Microsoft announced a 24% jump in income for Q2, powered by its booming cloud computing business. These results drove its stock price up 3.8% for the week at the time of writing, with its market capitalisation eclipsing $4 trillion just three weeks after Nvidia reached this milestone.
Meta was among the strongest gainers for the week, with investors strongly approving of the company’s healthy ad revenue growth as well as a clear strategy for monetising its AI investments. At the time of writing, Meta was up 8.5% for the week, after gaining 11.4% on Thursday after it reported Q2 earnings.
Amazon and Apple both also reported earnings that beat expectations, but Amazon was down 7.9% in pre-market trade on Friday as it faces retail margin pressures as well as tough cloud competition from Microsoft.
Apple also came under pressure on its exposure to tariff risks and questions about its slow AI rollout suppressed stock price gains, but its shares were trading 2% higher in pre-market trade today.
Alphabet delivered strong numbers last week that were driven by growth in its cloud division and continued strength in advertising. Of the Big Tech companies, only Nvidia is still left to report Q2 earnings.
Nonetheless, the Big Tech companies will have their work cut out for them in proving that their massive investments in AI will pay off in the long term. Microsoft, Meta, Amazon, and Alphabet are on track to spend over $350 billion on AI and cloud infrastructure this year and $400 billion next year.
For the year-to-date, we have seen strong divergence in the returns that the AI titans have delivered to investors. Microsoft (up 26.5%), Meta (up 32.1%), and Nvidia (up 32.5%) are leading the race. Amazon (marginally down year-to-date post yesterday’s after-market trading), Alphabet (up 1.3%), and Apple (down 17.1%), are all facing unique headwinds, despite the potential for AI to lift their earnings.
We may well see further divergence between the tech titans, depending on their actual earnings and earnings outlooks. While they are often lumped together as AI plays, the aforementioned companies operate in different sectors and are exposed to different risks and opportunities.
The Nasdaq and S&P 500 indices were relatively flat for the week, but this follows a remarkable run since their April lows, with both hitting record highs several times in the past few weeks, having been powered largely by the Big Tech firms, with the six companies accounting for about 30% of the S&P 500’s value.
One question that many investors are asking is if the Big Tech stocks are overvalued. If one accepts the thesis that AI companies are laying down infrastructure for the future that could be analogous to railways, electrical grids, or the internet, they should be far from exhausting their potential.
By historical standards and compared to the S&P 500, the valuations of six of the “Magnificent Seven” (excepting Tesla) seem high but not excessively so. However, fundamentals will come to the fore as the AI hype starts to settle, and not all seven are likely to be winners. Indeed, the market could still be disrupted by new players in the years to come.
A related question is whether other sectors can catch up in an equities market that has largely been driven by tech stocks for the past couple of years. Economists broadly agree that AI should lift GDP by boosting productivity across the board. How quickly that will translate into higher profits and valuations for companies that embrace AI rather than those that produce the underlying infrastructure and software remains to be seen. But as this shift takes place, we could witness a broader and sustained rally in stock market prices.
“As companies like Alphabet and Meta race to deliver on the promise of AI, capital expenditures are shockingly high and will remain elevated for the foreseeable future. If their core businesses remain strong, it will buy them more time with investors and provide confidence that the billions being spent on infrastructure, talent, and other tech-related expenses will be worthwhile.”
– Debra Aho Williamson, founder and chief analyst at Sonata Insights
“When they built the railroads in the 1880s, the equity values initially went nuts until reality set in, same story for radio stocks in the 1920s, and ‘dot-coms’ in the 1990s. We will reach that stage with AI that we’ve seen time and time again.”
– Drew Dickson, founder of Albert Bridge Capital
Global News
- Big Tech’s AI spending is surging, but so are the returns, with investors increasingly confident in the technology’s growth potential. In the April-June quarter, AI drove demand in internet search, digital advertising, and cloud computing, boosting revenue at Microsoft, Meta, Amazon, and Alphabet. To meet soaring demand, Microsoft, Alphabet, and Amazon are ramping up investment to overcome capacity constraints after several quarters of heavy spending. Analysts say the results highlight AI’s rise as a key growth engine, helping shield tech giants from tariff-driven economic uncertainty, even as monetisation of the technology remains in its early stages.
- It is tariff deadline day today, and President Donald Trump delivered by imposing fresh levies on imports from dozens of countries, including those that do not have a trade deal yet. He announced this morning that steep tariffs on over 60 countries will take effect on 7 August, with rates reaching as high as 50% for nations accused of unfair trade practices or refusing concessions. Among the tariffs imposed are 35% on Canadian goods outside the US-Mexico-Canada deal, 25% on India, 20% on Taiwan, 19% on Thailand, and 39% on Switzerland. While the EU, Vietnam, Japan, and the UK have secured trade agreements, Mexico faces sector-specific tariffs despite a 90-day extension. Additionally, the US will impose 25% tariffs on imports from India, along with an unspecified penalty for its purchases of Russian oil and weapons, according to Trump’s statement on his Truth Social platform yesterday.
- Trump on Wednesday issued an executive order imposing tariffs on low-value imports under $800 from all trading partners, effective 29 August. This ends the previous tax-free exemption for small shipments, affecting goods from companies like Temu and Shein that ship low-cost items directly to US consumers. The administration will maintain personal exemptions for travellers bringing back up to $200 in goods and duty-free gifts valued at $100 or less. However, the new rule applies to all shipments regardless of value, origin, or transport mode, suspending the de minimis exemption and raising costs for small imports.
- Federal appeals judges on Wednesday questioned the Trump administration’s claim that emergency powers permit the president to impose global tariffs. Justice Department lawyer Brett Shumate argued that a 1977 law gives the president authority to “regulate” imports, including setting tariffs. However, judges pointed to legislation and legal precedents suggesting Congress intended only limited tariff changes in response to specific threats. The court’s scepticism highlights a central issue in the broader legal debate over presidential trade powers: whether the White House can unilaterally revise the tariff schedule. The eventual ruling could shape how future administrations approach tariff policy.
- Fed Chairman Jerome Powell said interest rates are set correctly to manage ongoing tariff and inflation uncertainties, reducing expectations for a September rate cut. The Federal Open Market Committee voted 9-2 to keep rates in a range of 4.25%-4.5%, consistent with meetings this year. Futures show even odds for a September reduction, down from 60%. The dollar hit its highest level since May, Treasuries fell, and the S&P 500 dropped, marking the worst stock response on the day of a Fed decision since December. Ahead of the meeting, the S&P 500 had already snapped a six-day winning streak amid concerns over valuations and uncertain US-China tariff talks.
- The International Monetary Fund is marginally more optimistic about the global economy’s prospects than it was three months ago, but it has cautioned that tariffs could rise further and weaken growth. US tariff collections hit $90.6 billion in the first half of 2025, more than double last year. Trump said: “I think the trade deals are working out very well.” A big question is whether foreign companies will commit to manufacturing in the US to remain competitive in the mammoth American market. The problem they face, when it comes to multi-decade investment choices, is Trump’s continuously changing whims.
- The EU-US trade pact failed to boost risk appetite in shares in the bloc, a sign that the incremental impact from each new agreement is fading. European stocks posted modest gains on Tuesday, with the Stoxx 600 Index rising 0.6% to the highest level in a week. And in the US, the S&P 500 closed flat in the previous session. By comparison, when the US-Japan trade deal was announced, the Nikkei 225 soared 3.5% in a single day. The underwhelming reaction to the EU-US agreement highlights the steady decline in the impact of Trump’s trade initiatives on sparking a significant market reaction.
- Microsoft said on Wednesday it will spend over $30 billion this quarter to expand data centres powering its AI services. Its Azure division reported a 39% sales increase in the fiscal fourth quarter, surpassing analysts’ 34% forecast. Microsoft’s annual cloud division sales rose 34% to over $75 billion, the first time the company disclosed Azure revenue. The strong results indicate Microsoft’s massive AI investments are driving rising sales. Investors responded positively, pushing Microsoft shares up as much as 9%, reflecting confidence in the company’s accelerating growth in cloud computing and AI services.
- Meta Platforms is ramping up spending next year, leveraging strong advertising profits to invest in AI. Analysts expect spending to hit $16.4 billion – double last year’s figure – while revenue is projected to rise 15%, according to Bloomberg. CEO Mark Zuckerberg, in a video and written update on Wednesday, unveiled plans for a “personal superintelligence” offering aimed at assisting users rather than replacing jobs. He also addressed Meta’s AI team and potential hires, emphasising the company’s AI capabilities. User growth rose 6.4% year-on-year, and second-quarter revenue and profit grew 22% and 36% respectively, beating expectations. Meta forecasts up to $50.5 billion in current-quarter revenue, sending shares up over 10% after hours.
- Amazon reported strong Q2 results yesterday with $167.7 billion in revenue and better-than-expected earnings, but following an initial surge, shares fell 7.9% in late trading after the company projected a lower-than-expected Q3 operating income. Investors remain concerned about short-term profitability as Amazon ramps up AI-related spending, particularly in Amazon Web Services, which underperformed compared to Google Cloud’s 32% growth. CEO Andy Jassy is locked in an AI infrastructure arms race with Microsoft and Alphabet, both of which have posted strong earnings this cycle, further intensifying pressure on Amazon to show returns on its heavy investments.
- Apple posted its strongest quarterly revenue growth in over three years, surpassing Wall Street expectations as demand for iPhones and other products, particularly in China, rebounded. Revenue rose 9.6% in the fiscal third quarter ended June 28, outperforming analyst estimates compiled by Bloomberg. The company also forecast fourth-quarter revenue growth in the mid- to high-single digits range, exceeding the 3% analysts had projected. While US tariffs have raised Apple’s operating costs, they temporarily boosted sales last quarter as consumers rushed to buy ahead of anticipated price hikes – though this accounted for just 1 percentage point of the overall 10-point sales increase.
- For the first time, India has become the top exporter of smartphones to the US, driven by Apple’s shift of manufacturing to New Delhi due to tariffs, according to a new report published on Monday by research firm Canalys. In the second quarter, India-made phones made up 44% of US smartphone imports, up from 13% the previous year, with volumes rising 240%. Meanwhile, China’s share of the market plunged to 25%, down from 61%, dropping it to third place behind Vietnam. This marks a significant shift in global smartphone supply chains, reflecting the impact of trade policies on manufacturing locations.
- Ford warned on Wednesday that its profit will drop sharply, forecasting adjusted earnings before interest and taxes to fall up to 36%, mainly due to a $2 billion tariff impact – $500 million higher than expected. Despite strong US production, tariffs on vehicles, parts, steel, and aluminium are raising costs. CEO Jim Farley said policy shifts, including eased pollution rules and a US-Japan trade deal lowering tariffs from 25% to 15%, are pushing the auto industry toward regional markets. It is increasingly seeing Europe, North America, and Asia becoming regional businesses. Ford shares fell 2.4% after hours, despite a 10% gain this year.
- Obesity drugmaker Novo Nordisk on Tuesday cut its full-year sales and operating profit forecasts for the second time this year, sending its shares down as much as 17%. The maker of weight-loss drug Wegovy is struggling to convince investors it can remain competitive in the obesity drug boom against US rival Eli Lilly. “The lowered sales outlook for 2025 is driven by lower growth expectations for the second half of 2025,” the company said in a statement. Novo shares have fallen sharply over the past year. However, the share price may now be near its trough, following the appointment of a new CEO. (Novo Nordisk is a holding in the Fundsmith Equity Fund, and has been the major contributor to the Fund’s year-to-date under performance).
- As at Thursday’s close the S&P 500 was down 0.77% for the week.
Local News
- The Reserve Bank has pre-empted expectations by effectively shifting its inflation target to 3%, surprising markets that anticipated such an announcement from Finance Minister Enoch Godongwana during October’s medium-term budget statement. The move was revealed yesterday alongside a widely expected 25bps rate cut, bringing the lending rate to 7%. The Bank now forecasts inflation to average 3.3% in 2025. It’s 3% scenario, first outlined at the May MPC meeting, suggests the potential for up to five rate cuts over the coming years, which could lower the repo rate to below 6%.
- The rand fell to its weakest level in six weeks at 1 pm yesterday to R18.12 against the dollar as investor concern mounted over diverging monetary policies in the US and locally, along with escalating trade tension. As of 3 pm today, the rand was trading at R18.05.
- Today’s 30% imposition of tariffs by the US has resulted in South Africa implementing a contingency plan to keep production lines moving in key sectors such as automotive, agro-processing, steel, and chemicals, among others. South Africa’s trade team, led by Trade, Industry, and Competition Minister Parks Tau and US Special Envoy Mcebisi Jonas, were this week engaged in deal-making and diplomatic efforts ahead of the deadline. The government is offering alternative markets and Treasury-backed tax incentives to the motor vehicle and agricultural sectors to maintain production. Late on Tuesday, Tau announced a R60 billion investment pledge in the US, signalling a reset in bilateral relations. Meanwhile, the trade department had urged the AU to accelerate intracontinental trade through improved regulations and infrastructure development.
- The International Monetary Fund kept its growth forecasts for South Africa unchanged in its latest World Economic Outlook update, released on Tuesday, at 1% for this year, rising to 1.3% in 2026. The Fund’s latest forecast assumes that current tariff levels will prevail, even though it wasn’t clear at the time what Trump plans to do when his next round of tariff increases comes into effect. The forecast, unchanged from April, is lower than what it expected in January.
- The National Council of Provinces passed the Appropriation Bill on Wednesday, finalising the National Budget’s journey through Parliament. The Bill now awaits President Cyril Ramaphosa’s assent to become an Act. Deputy Finance Minister David Masondo warned the National Assembly last week, when the Appropriation Bill was before the House, that the government couldn’t access money by October if the Budget didn’t pass by today.
- Municipalities are in crisis, according to Auditor-General Tsakani Maluleke. In her 2023/24 Annual Report and a recent discussion with the Centre for Development and Enterprise, Maluleke warned of widespread mismanagement. She highlighted poor revenue management, weak debt collection, flawed budgeting, and financial losses from poor-quality spending as key issues undermining financial viability and service delivery. Co-operative Governance and Traditional Affairs Minister Velenkosini Hlabisa is set to meet various metro leaders after Business Leadership South Africa expressed concern about their deteriorating services on Monday.
- President Cyril Ramaphosa is pressing government officials to back his vision of South Africa as a global hub for new-energy vehicle manufacturing. Speaking on Thursday at the BMW SA assembly plant in Tshwane, he said government is finalising incentives for battery-cell localisation, EV components, clean mobility research, and critical minerals beneficiation. The industry currently exports two-thirds of its vehicles, mainly to markets phasing out combustion engines. Minister for Electricity and Energy, Kgosientso Ramokgopa, on Wednesday, said there was an urgent need for a fundamental reconfiguration of the global energy finance architecture.
- Local ports moved over 100,000 20-foot equivalent units in week 16 of the current financial year, a level last seen in 2017/18. Significant gains were noted at Durban Container Terminal Pier 2, the flagship in Transnet’s port portfolio. Transnet Port Terminals (TPT) CEO Jabu Mdaki told BusinessLIVE late last week that he expects the improved performance to continue. TPT plans to invest R4 billion in new equipment by April 2026, after investing R3.4 billion last year. On Sunday, the government said it approved R94.8 billion in guarantees for Transnet to support debt redemptions and ensure liquidity over the next five years.
- The Government of National Unity could see a tax windfall from surging platinum group metals (PGMs) and gold prices, echoing the 2021/22 commodity boom. While the country’s gold output is limited, its position as the world’s largest PGM producer, especially with sanctions sidelining Russia, positions it to benefit significantly. The rally has boosted mining stocks on the JSE and may bolster state revenues. However, Old Mutual cautioned on Wednesday that the key question is how the government will use this additional revenue to support growth and stability in the current economic environment.
- Anglo American reported an interim loss of $1.88 billion yesterday as it advanced its restructuring strategy to focus on copper and iron ore, following the demerger of its platinum unit in May. The group is also moving forward with agreed sales of its steelmaking coal and nickel businesses and remains on track to achieve targeted cost savings. It noted continued progress toward a more streamlined portfolio. Revenue from continuing operations fell 7%, and loss per share widened, with underlying earnings impacted by ongoing market challenges faced by De Beers. A dividend of R1.27 per share was declared.
- Diversified global resources group Glencore is confident of delivering its full-year production guidance, with the ranges now tightened to reflect performance to date, it said on Wednesday in its half-year production report. CEO Gary Nagle said the group had made progress in optimising the business. He said the review identified about $1 billion of cost savings opportunities across various operating structures, which are expected to be fully delivered by the end of 2026. Nagle said the second half is expected to generate significant cost savings resulting from those initiatives.
- Woolworths Holdings expects earnings for the year ending June to decline by up to 27%, mainly due to the underperformance of its Australian Country Road Group (CRG) and the impact of non-cash impairments. The CRG business has been undergoing a major restructure following its separation from David Jones. While local operations showed strong growth, it was insufficient to offset the challenges faced by the Australian segment. The group noted that results for the 52 weeks ended June 29 are not directly comparable to the 53 weeks in the previous year.
- As at the time of writing, the rand was 1.8% weaker against the dollar, and the ALSI was 1.65% down for the week.
Sources: Dynasty, Bloomberg, BBC, Reuters, NYT, BusinessLIVE, CNN, Business Report, The Economist, etc.
