Questions on AI returns sharpen after Nasdaq's worst month since March 2025: BlackRock

The shift in which companies lead earnings backs a widening of the US equity market beyond megacap tech. This trend benefits a balanced weighting and non-tech holdings rather than concentrated index leaders. BlackRock's focus on credit markets as a measure of future AI funding capacity highlights spreads on hyperscaler and AI-related debt as a key signal for tech stocks. The combination of a Treasury advance with the tech rout hints that bonds can still provide a portfolio buffer when the mood on AI turns negative. Within emerging markets, the emphasis on supply constraints in AI directs attention toward Asian semiconductor companies. The near-term macro indicator is Friday's US jobs report: if wage growth is stronger, it could fuel core services inflation and make the Treasury rally harder to sustain.

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Previously:

• Apple repurchased $24 billion of its stock in the latest quarter, as its purchase commitments rose by $33 billion

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BlackRock maintains its belief in AI, but notes that the scale of spending now leads investors to seek evidence of returns, while the broader market is generating higher earnings than the tech giants.

Summary:

• Investor examination of AI is growing this earnings season, following the Nasdaq's worst performance since March 2025, according to BlackRock.
• Profit growth for the S&P 500 excluding the "magnificent seven" sits at roughly 29%, ahead of about 18% for the megacap companies, marking the first reversal since 2022.
• Hyperscaler capital expenditure has increased to roughly $650 billion over the last twelve months, up from about $360 billion, while incremental margins have declined to about 28% from 40%.
• BlackRock cut its rating on US stocks to neutral last month to secure profits. It maintains its faith in AI and has an overweight position in emerging market stocks through AI supply constraints.
• As the AI infrastructure build relies more on borrowing, credit markets are viewed as a vital indicator. Ten-year Treasury yields dropped nearly 6 basis points to 4.93% last week.
• The firm is monitoring October's US employment figures for signs of wage pressures that might increase core services inflation.

Investors want more concrete proof that the current wave of AI expenditure can produce profits, BlackRock stated. Earnings leadership in the US equity market has also moved away from the biggest tech names for the first time in four years.

In its weekly note, BlackRock's investment arm stated that AI scrutiny is rising this earnings season following the Nasdaq Composite Index's worst monthly showing since March 2025. Four years of substantial AI spending have driven profit expectations up sharply, while increasing capital investment is squeezing free cash flow, pushing it negative in some instances.

The landscape for the largest tech firms has shifted rapidly. Earnings expansion for the rest of the S&P 500 index is at roughly 29% in Q3, against about 18% for the "magnificent seven" stocks, BlackRock reports, using estimated figures. This represents the first time since 2022 that the smaller group has grown faster than the megacaps. Based on LSEG data, analysts project total S&P 500 earnings growth of around 30%, the third quarter in a row above 20%.

The firm pointed to an expanding strain between robust demand for AI and the expense of addressing it. Capital expenditure by hyperscalers has risen to roughly $650 billion over the last year from about $360 billion in the year before, Bloomberg data shows. Operating margins have ticked up to 27.1% from 26.9%, but incremental margins have dropped to about 28% from 40%. This brings up the question of whether profits can stay matched with investment, the firm noted.

There are some positive indicators. BlackRock's analysis shows that companies in non-tech and non-communications sectors which have adopted more AI are set for 3% quicker earnings expansion this quarter compared to those with less adoption. Cloud expansion at Microsoft and Alphabet similarly signals ongoing demand.

As the expansion depends more on borrowing, BlackRock stated that credit markets have become a key indicator of just how much additional AI investment can be funded, and at what price. US government bonds advanced along with last week's tech selloff. Ten-year yields declined by nearly 6 basis points to 4.93% after the Federal Reserve left rates unchanged.

The firm downgraded US stocks to neutral last month to seal in gains, but stated its confidence in AI fundamentals stays strong. BlackRock favors businesses and listed infrastructure that stand to gain from bottlenecks in the AI expansion. This preference supports its overweight position in emerging market stocks, especially in Asia. Focus now shifts to Friday's October employment data, where BlackRock anticipates indications of stronger wage pressure that might add to core services inflation.