Shares of Microsoft, Amazon, and Alphabet have lagged the S&P 500 since the start of the year, and their quarterly reports should answer a key question: are the hundreds of billions of dollars invested in artificial intelligence paying off? For investors, this is a chance to buy the tech giants' stocks after their underperformance if AI revenue meets expectations — but also a risk of another pullback if expenses continue to outpace income.

The answer matters not only for holders of these companies' shares but also for owners of S&P 500 index funds, which include all three corporations. Cloud service clients will also learn whether the tech giants will continue expanding AI capacity or begin cutting costs.

AI spending outpaces cash flow

Amazon, Microsoft, and Alphabet have accumulated nearly $1.7 trillion in orders. These are signed contracts for cloud and AI services, for which the companies will receive money in the future. At the same time, this year they plan to spend up to $600 billion on data centers and equipment.

Microsoft and Alphabet's quarterly reports are scheduled for October 28 after the close of US trading, and Amazon reports on October 29. All three companies' shares have lagged the S&P 500 since the start of the year, which has risen 11.37%: Microsoft is up 8.45%, Amazon 7.44%, and Alphabet only 2.3%. Meta's shares fell 2.65% over the same period.

Alphabet's free cash flow is forecast to be negative for the second consecutive quarter, and Amazon's for the third: investments in AI infrastructure exceed the amounts earned by their core businesses. Amazon's revenue growth rate is expected to slow from 19.6% to 12.3%.

Investors are increasingly worried about rising financing costs, shrinking free cash, and the possibility that AI revenue will not recoup the gigantic expenses, while competition from AI agents additionally threatens Google's search business.

Meta's example already shows that the market is not prepared to tolerate rising costs: after its recent report, the company's shares fell almost 7%. At the same time, revenue grew more than expected, and the forecast turned out to be optimistic.

What this means for chipmakers and the entire tech sector

Building data centers for AI is already bringing record revenues to suppliers: SK Hynix will direct about $75 billion to shareholders through dividends and share buybacks. The memory maker's third-quarter revenue grew 316%, and chip orders are booked through 2029.

However, investors are not sure such profits will last long: the price-to-earnings (P/E) ratio of the KOSPI Semiconductor index of South Korean chipmakers is just 2.8 versus a historical average of about 9.8. Valuations have not been this low even during the 2008 crisis.

Niles Investment Management founder Dan Niles believes the AI market has not yet peaked thanks to the development of AI agents, but still advises investors to hold more cash. According to him, raising money through debt and equity is becoming more expensive, while AI companies' revenue is growing more slowly.

Cryptalist analysis: The market is entering a phase where the scale of AI capital expenditure is no longer a self-sufficient argument for rising valuations — investors demand confirmation of monetization. If the reports of Microsoft, Amazon, and Alphabet do not demonstrate an acceleration in AI revenue against the backdrop of negative free cash flow, the tech sector faces a correction that will inevitably affect the broad market and risk assets, including cryptocurrencies. The low valuation of Asian chipmakers remains telling: the market is already pricing in the risk of a slowdown in the AI investment cycle.