War! What war?  Investors have become accustomed to ignoring negative headlines after four years in which market disruptions have done little to dent global growth momentum.  After falling by almost 10% in the first few weeks following the late February initial bombing of sites in Iran by both the U.S. and Israel, stocks turned around in late March and surged back to all-time highs in April, driven almost solely by a recovery in the ‘somewhat beaten up’ technology sector.  With stock valuations rising along with both the price of oil and inflation, the stock market is effectively saying that this is the least risky macro environment that we’ve seen for the last 20 years.  Markets are saying there is a high probability that the surge in oil prices will not lead to weaker growth momentum despite the historical evidence suggesting that large energy shocks have typically led to sharp economic downturns and often full-blown recessions.  Stock investors have been buying into the Trump narrative that this conflict will only last 4-6 weeks (even though we are now in the 9th week) and that oil and gas prices will soon drop back to their pre-invasion levels and maybe even lower.  Maybe this is another stock market bet on a Trump TACO, believing that the U.S. will continue to look for an ‘off ramp’ to the conflict under which they can still claim it as a victory.  Current evidence and history both to the contrary, stock investors are clearly looking through the conflict to a much better economy and interest rate outlook on the other side.

One very legitimate reason for ongoing optimism in the stock market is due to the continued massive spending in the technology on the rollout and implementation of AI models.  Evidence of this strength came through once again this week in the SuperBowl of earnings releases after the close, with all four major hyperscalers; Microsoft, Meta, Alphabet and Amazon all reporting earnings on the same day.  Not only was this an unheard-of earnings reports from four companies that alone account for around $12 trillion of market cap (more than the entire value of the US market at the time of the financial crisis) but, more importantly, they gave major signals on two key questions driving the market.  Will they maintain their massive capex plans for this year or increase them once again?  This was key not only for the worries around negative free cash status of these companies as well as for all of the suppliers to this growth such as the major semiconductor companies.   The second major question they had to answer was how quickly and effectively are they monetizing these massive investments in AI?  This impacts the other side of the free cash flow question, which is the EBITDA growth.  The growth of the public clouds for MSFT, GOOG and AMZN have been monitored closely, with any disappointments treated harshly as evidenced last quarter when MSFT Azure missed 40% growth expectation with ‘only’ 38% growth and the stock got hammered post earnings.  For META and GOOG, they are the major litmus tests for ad spending as well as how they are able to see growth in their applications from clients due to the implementation of AI.

So how were the results?  While there were mixed responses depending on any specific factors, the overall trend confirmed the bullish outlook that AI capex will continue unabated for now and the major hyperscalers are starting to monetize this spending very effectively, with cloud growth accelerating, agentic applications such as Microsoft co-pilot growing and ad spending continuing to increase and become more effective.  In terms of the individual reports, Google was the big winner as it reported strong Q1 results, with total revenue modestly ahead of expectations on continued Search momentum and a standout quarter for Cloud.  Advertising revenue growth accelerated by 200 basis points, thanks to the increased deployment of Gemini across ad infrastructure, which is making search more useful and enabling Google to better understand user intent to find the most relevant ad, even in instances when there is no direct user query. Gemini 3 is also making search more efficient, with Google’s cost to serve core AI responses down by more than 30%.  The bigger story of the quarter, however, was Cloud, which exceeded $20B for the first time, accelerating by over 1500 basis points to more than 60% year over year growth.   Google Cloud backlog of $462B nearly doubled over the prior quarter.  

Meta also reported strong results, with total revenue coming in ~1.5% above consensus, growth accelerating and profitability solidly ahead of expectations.  But the stock did fall by almost 10% following the release as there was some disappointment in the growth of average daily and monthly users of its various applications, although management claimed it would have increased if not for internet outages in Iran and blocks in Russia.  Management indicated that engagement is at an all-time high across both FaceBook and Instagram, driven in large part by video, and the company continues to increase monetization efficiency by (1) deploying AI more deeply at each layer of its internal ad ranking and recommendation systems, and (2) scaling tools that help advertisers maximize customer engagement.  But the other thing investors disliked was the fact that capital spending intentions were increased due to higher input costs, particularly from memory chips.  This drove full-year guidance to $125-145B, increased from a prior range of $115-135B.  Spending continues to be a ‘hot button’ item for all these companies.  Investors want to see increased returns on existing spending rather than plans to increase it further.  However, post earnings the stock is now trading under 20 times expected earnings for this year, and it continues to show exceptional overall growth.  We are inclined to add to our small existing position on this decline.  Microsoft also delivered solid results with all segments above consensus, highlighted by Azure growth accelerating to over 40% as demand continues to exceed available capacity, and management foresees Azure acceleration over the next few quarters.  More evidence of important AI growth was seen in continued M365 Copilot traction, with record quarter seat adds, +250% year-over-year growth. 

One of the main reasons that the technology sector had such a strong rebound in the past month is that the technology sector retains the lead in earnings growth with the main caveat being that earnings growth changes have been exceptionally narrow.  While consensus earnings-per-share estimates for this year and next are 4% above where they were in January, energy and information technology stocks account for almost all the increase.  The Iran war has triggered a surge in energy prices, while tech stocks are benefiting from renewed optimism around artificial intelligence investment.  Only two names — Micron Technology Inc. and Exxon Mobil Corp. — together account for more than 60% of the consensus increase in 2026 S&P500 earnings estimates since the conflict began.  The median company in the index has seen no revision to 2026 earnings estimates in the past few months.  That same trend is also being reflected in the very narrow breadth of the stock market advance since the end of March.  Excluding the Magnificent Seven stocks (Alphabet, Amazon, Apple, Meta, Microsoft and Nvidia), the market value of the S&P is actually down.  Put another way, these seven are lifting the entire market.  Declining breadth is traditionally an indicator of a weakening or riskier stock market outlook.  See in the chart below the declines in breadth prior to market downturns in 2000, 2008, 2015, 2020 and 2022. 

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