Stocks in the US closed sharply lower on Thursday, after the GDP release showed the US economy slowed down sharply and pointed to persistent inflation.
The S&P 500 lost roughly 0.5%, the Dow Jones tumbled 375 points after dropping 540 points earlier in the session, and the Nasdaq fell 0.6%.
However, core PCE prices increased by 3.7%, surpassing expectations.
In addition to the economic data, disappointing earnings reports from companies like Meta and IBM also weighed on sentiments.
Meta's stock dropped 10.5% after issuing a weak revenue outlook, despite reporting better-than-expected first-quarter results.
We heard from Meta the other day, which we discussed in my last note;
They grew revenues by 27%, compared to the same quarter last year.
They grew net income by 114%.
They expanded operating margins from 25% to 38%.
Meta was scrutinised for its ongoing massive investment in AI infrastructure - they are in the third year of what will be a $100 billion three-year spend on servers, data centres, and network infrastructure.
The stock was punished. Yesterday, we heard from Google (Alphabet) and Microsoft.
Google;
Google grew revenues by 15% compared to the same quarter last year.
They grew net income by 57%.
They expanded operating margins from 25% to 32%.
Microsoft;
Microsoft grew revenues by 17% compared to the same quarter last year.
They grew net income by 20%.
They expanded operating margins from 42% to 45%.
Like Meta, both Google and Microsoft are making massive investments in building AI infrastructure capacity. Both stocks went up after earnings (Google, about 10%).
From 2022 through this year, all of the AI barons are spending in the neighbourhood of $100 billion in capex on AI infrastructure. They will likely do more, to build the capacity needed to meet the insatiable customer demand for computing resources to run AI products and services.
As Microsoft put it, in their call in the afternoon, this is just the first wave, and they are building for the "second wave" of AI.
So, these are trillion-dollar plus companies, growing at an accelerating double-digit pace, rapidly adding new products and services, with smaller headcount, and at a higher and higher rate of profitability. They're not expensive (Meta – 23x forward PE, Google 22x, MSFT 31x).
It's still the early days of the most productivity enhancing technology advancement of our lifetime: generative AI.