By Rob Crookston, Investment Strategist at Bell Potter Securities
The bear case on artificial intelligence has always rested on one question: when does all the spending actually pay off? For two years, the world’s largest technology companies have been pouring capital into chips, power and data centres at a pace that invited comparison with the dot-com build-out. The first-quarter US reporting season offers the clearest answer yet, and it is not the one the sceptics were hoping for.
A reporting season with few weak spots
With more than two-thirds of the S&P 500 reported, 84 per cent of companies have beaten earnings estimates and 80 per cent have beaten on revenue, both comfortably above their five and ten-year averages. Year-on-year earnings growth has been revised up to 27.1 per cent, the sixth consecutive quarter of double-digit expansion. Revenue growth of 11.1 per cent is the strongest reading since the second quarter of 2022.
More striking is what is happening to forward estimates. Calendar 2026 earnings have been revised up 2.6 per cent since the end of March, the largest April upgrade in five years against a twenty-year average first-month revision of minus 1.9 per cent. Estimates for 2027 point to roughly 17 per cent growth. Analysts have been raising numbers since the middle of last year, and the cycle is accelerating rather than fading.
That is happening with little help from the macro backdrop. The Hormuz oil shock is still working through global inventories, headline inflation remains sticky, and central banks have been forced to shelve rate cuts. Earnings are climbing in spite of the weather, not because of it.
Concentrated, but not narrow
The familiar criticism is that the index is being carried by a handful of names. There is truth in it. The largest technology stocks are tracking around 61 per cent earnings growth this quarter against 16 per cent for the rest of the index, and four of the top five contributors to earnings growth come from that cohort. Strip the two biggest names out of Communication Services and growth collapses from 53 per cent to 9 per cent.
Yet 16 per cent for everyone else is hardly pedestrian, and the participation is broad. Nine of eleven sectors are growing earnings, all eleven are growing revenue, and seven are posting double-digit gains. Nine sectors have seen full-year upgrades. The giants are doing the heavy lifting, but the breadth beneath them is healthier than the headlines suggest.
The spending is being validated
Capital expenditure does sit at eye-watering levels, with close to US$700 billion forecast from the four largest hyperscalers this year. The bear argument, that this is unproductive spend at bubble valuations, is getting harder to sustain.
Demand is outrunning supply. Order books across the AI supply chain are filling faster than capacity can be added. Remaining performance obligations at Amazon, Google and Meta have grown more than 120 per cent over the past year and now sit above US$1 trillion. The same dynamic is visible further up the chain among the picks-and-shovels providers: backlogs at power and infrastructure specialists are up roughly 100 to 110 per cent, and one of the large equipment makers reports a record order book some 79 per cent higher than a year ago. This is multi-year revenue visibility, the kind that lets earnings keep compounding regardless of the macro cycle.
The unit economics are improving too. Operating margins expanded across all three major cloud platforms as higher-margin cloud revenue grows as a share of the mix. At the index level, the blended net profit margin sits at 14.7 per cent, well above the five-year average of 12.3 per cent, and the gains are concentrated in the sectors most exposed to AI.
Meta as the cleanest test case
Among the giants, Meta offers perhaps the purest read on whether the build-out converts into profit. It does not sell cloud capacity to anyone; its compute is consumed entirely in-house for ad targeting, ranking and productivity tools. There is no external customer to dress up the return. Either the spending pays for itself through the company’s own profit and loss, or it does not pay at all.
This quarter it appears to be paying. Revenue accelerated to 33 per cent growth, with ad impressions up 19 per cent and average price per ad up 12 per cent, exactly the combination one would expect if AI-driven targeting were working. The market flinched at a lifted capex guide, but the company still generated meaningful free cash flow and guided operating income higher.
Risks worth watching
None of this makes the trade riskless. A breakthrough in model efficiency could undercut demand for the capacity being built, as a brief episode early last year demonstrated. The current leaders may not stay dominant. And the longer-term labour market effects of AI deployment remain an open question.
For now, though, the bottlenecks in power, chips and construction are real, demand continues to outstrip supply, and the numbers are moving in the right direction. The return on AI is no longer purely a matter of faith.
Tandem Securities, Tandem Clearing and Desktop Broker are registered business names of Third Party Platform Pty Ltd (TPP), ABN 74 121 227 905, Australian Financial Services License (AFSL) 314341. TPP is a Market Participant of ASX Limited, Trading Participant of Cboe Australia Pty Ltd, Settlement Participant of ASX Settlement Pty Ltd and a Clearing Participant of ASX Clear Pty Ltd. Tandem Capital is a registered business name of Bell Potter Capital Limited (BPC), ABN 54 085 797 735, AFSL No. 360457. BPC is licensed to offer Margin Lending Services. Tandem Securities, Tandem Capital, Tandem Clearing and Desktop Broker do not provide investment advice, information provided in this document has been prepared without consideration of any specific clients financial situation, particular needs and investment objectives. It is general information only and does not constitute investment or other advice.
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