UBS sets out three AI trade tests as Meta starts mega-cap earnings

Higher financing costs and climbing interest rates are tightening the room for open-ended AI spending, making capital expenditure guidance the key focus for markets this reporting season. If spending looks set to outstrip revenue, hyperscaler stocks could suffer even when headline numbers beat expectations. Meanwhile, clear pledges to keep investing would likely lift semiconductor and AI hardware companies higher up the supply chain. UBS cautions that results may deliver bigger divergences between winners and losers than the AI trade has typically produced. Meta, an advertising-driven business that is pouring money into AI, will set the initial tone.

Earlier coverage:

• Earnings pick of the week: Meta faces a $145 billion question after the tech rout
• Why earnings season matters and how early reporters shape expectations

According to UBS, the AI trade is no longer about adoption alone; in the current season, large tech companies must demonstrate that their outlays are generating revenue, profitability and returns.

Key points:

• Meta's Wednesday after-close results kick off the mega-cap tech reporting period
• UBS sees rising rates and financing costs bringing AI monetisation and capex returns under greater investor focus
• The bank assesses core business health, AI monetisation past the adoption phase, and concrete returns from infrastructure outlays
• UBS anticipates robust third-quarter fundamentals yet cautions that high expectations could trigger volatility at individual companies
• It stays positive on the structural AI outlook, preferring hyperscalers and top-tier semiconductor and hardware plays

This earnings season, large US tech companies must prove that AI can produce returns sufficient to warrant their heavy capital outlays, UBS argues. The bank has laid out three criteria it believes will influence the AI trade through 2027.

Meta Platforms will start the mega-cap tech earnings wave when it posts third-quarter numbers after Wednesday's US market close, followed by a conference call at 4:30 p.m. ET (20:30 GMT). According to UBS, climbing rates and financing expenses lead investors to examine more closely whether AI can generate significant revenue even as capital spending pressures free cash flow. UBS offered no opinion on any individual firm.

The first criterion concerns core business health. UBS notes the biggest tech companies start this period with solid standing in advertising, software, devices and digital commerce; ongoing demand in these segments finances AI spending and softens earnings blows. Whether current growth can endure as year-over-year comparisons become stiffer and economic uncertainties linger is the open question.

Second comes monetisation. UBS sees growing adoption of AI offerings as promising, yet investors are looking for proof that usage converts into income and earnings via subscriptions, usage-based fees, ads, transactions or stronger cloud take-up. Transparent pricing and evidence customers will pay would bolster the argument that AI is a revenue engine rather than merely a spending program.

Third, returns on investment. Even with AI revenue climbing, the size of infrastructure outlays affects margins and cash flow. UBS expects investors to watch utilisation rates, pricing leverage, capital demands and returns on AI spending, while executives' remarks about upcoming capex will probably set expectations for 2027 and later.

On the whole, UBS foresees a strong quarter on fundamentals but warns that high expectations may create volatility for individual companies. The bank keeps a constructive outlook on the long-term AI opportunity, finding value in hyperscalers and quality semis and hardware names, and advises investors with heavy tech concentrations to consider diversifying across sectors and geographies during strength.

With Meta leading off and the rest of the mega-caps reporting over the next few weeks, capital expenditure guidance may carry as much weight as the quarterly figures.