The flip in earnings leadership supports a broadening of the US equity market away from megacap tech. That favours equal-weight and non-tech exposure over the concentrated index leaders. BlackRock’s emphasis on credit markets as a gauge of how much more AI investment can be financed puts spreads on hyperscaler and AI-linked debt in focus as a leading indicator for tech equities. The pairing of a Treasury rally with the tech selloff also suggests bonds can still cushion portfolios when AI sentiment sours. In emerging markets, the preference for AI supply bottlenecks points toward Asian chipmakers. Friday’s US jobs report is the near-term macro test: stronger wage growth would feed core services inflation and complicate the rally in Treasuries.
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Earlier:
Apple bought back $24 billion of stock in the quarter as purchase commitments jump $33 billion
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BlackRock still believes in AI, but says the spending bill is now big enough that investors are demanding proof of returns, and the rest of the market is quietly out-earning the tech giants.
Summary:
BlackRock says investor scrutiny of AI is intensifying this earnings season, after the Nasdaq posted its worst month since March 2025
Earnings growth for the S&P 500 excluding the “magnificent seven” is running at about 29%, ahead of roughly 18% for the megacaps, the first such flip since 2022
Hyperscaler capex has risen to about $650 billion over the past year from about $360 billion, while incremental margins have fallen to about 28% from 40%
The firm recently downgraded US equities to neutral to lock in profits but says its conviction in AI remains intact, and it is overweight emerging market equities via AI bottlenecks
It sees credit markets as a key signpost as the AI buildout becomes more debt-financed; 10-year Treasury yields fell nearly 6 basis points to 4.93% last week
BlackRock is watching October US jobs data for wage pressure that could lift core services inflation
BlackRock says investors are demanding clearer evidence that the AI spending boom can deliver returns. Earnings leadership in the US stock market has also shifted away from the largest technology companies for the first time in four years.
In its weekly commentary, the BlackRock Investment Institute said scrutiny of AI is intensifying this earnings season, after the Nasdaq Composite posted its worst month since March 2025. Four years of heavy AI investment have pushed earnings expectations sharply higher, and rising capital spending is squeezing free cash flow, in some cases pushing it negative.
The backdrop for megacap tech has changed quickly. According to BlackRock, earnings growth for the rest of the S&P 500 is running at about 29% in the third quarter, compared with roughly 18% for the “magnificent seven” stocks, with figures including estimates. That is the first time the smaller group has outpaced the megacaps since 2022. Consensus expects overall S&P 500 earnings growth of about 30%, a third straight quarter above 20%, based on LSEG data.
BlackRock highlighted a growing tension between strong AI demand and the cost of meeting it. Hyperscaler capital spending has climbed to about $650 billion over the past year from about $360 billion in the prior year, according to Bloomberg data. Operating margins have edged up to 27.1% from 26.9%, but incremental margins, the extra profit generated by each additional dollar of revenue, have fallen to about 28% from 40%. That raises the question of whether returns can keep pace with investment, the firm said.
There are encouraging signs. BlackRock’s analysis finds companies outside the tech and communication sectors with higher AI adoption are on track for 3% faster earnings growth this quarter than lower adopters. Cloud growth at Microsoft and Alphabet also points to sustained demand.
As the buildout relies more on debt, the firm said credit markets have become an important signal of how much further AI investment can be financed, and at what cost. US Treasuries rallied alongside last week’s tech selloff, with 10-year yields falling nearly 6 basis points to 4.93% after the Federal Reserve held rates.
BlackRock downgraded US equities to neutral last month to lock in profits but said its conviction in AI fundamentals remains intact. It prefers companies and listed infrastructure positioned to benefit from bottlenecks in the buildout, which underpins its overweight in emerging market equities, particularly in Asia. Attention now turns to Friday’s October jobs report, where BlackRock expects signs of stronger wage pressure that could add to core services inflation.
This article was written by Eamonn Sheridan at investinglive.com.
