Danske Bank strategists note that Equities advanced on Wednesday, with the S&P 500 and Stoxx 600 higher as the AI trade rebounded for a third session. Alphabet and Microsoft’s after-hours results delivered a mixed picture for AI-related revenues and capex. They highlight that unchanged capex guidance may limit further earnings revision rallies in the broader data centre and semiconductor complex.

AI-driven equity gains face mixed signals

“Equities ended higher on Wednesday, with the S&P 500 up 0.3% and the Stoxx 600 up 0.7%. The AI trade rebounded for the third straight session, and gaining new momentum as SK Hynix surprised positively on earnings and particularly on extended demand visibility.”

“For the AI revenue stream, Google Cloud revenues more than doubled and surpassed estimates. But as the core business disappointed while AI spending accelerated, free cash flow was sharply negative instead of close to break-even, as consensus had estimated, and the stock fell 10% after hours, although the takeaway was not necessarily negative for the general AI trade. Microsoft, on the other hand, was strong across the board.”

“The AI business, Azure cloud, grew 48% and generated about USD 19 billion in free cash flow, which was USD 10 billion more than analysts expected. So, quite the opposite conclusion from Alphabet, and this is increasingly setting Microsoft apart from Alphabet and Meta, or CoreWeave and Oracle for that matter, whose AI investments are dependent on more borrowing.”

“However, unchanged capex guidance also means that we should not see the same rally in earnings revisions following reporting as in earlier quarters, when higher capex spending immediately triggered higher estimates in the data centre supply chain and, not least, within semiconductors.”

“The reaction to the hyperscaler reports is, all in all, slightly negative today, with the Kospi down 0.7%. Nasdaq futures are down 0.9%. However, in light of the big moves within the AI trade lately, these are surprisingly small moves.”