AI Trade is under scrutiny this revenue season

Large tech companies will let investors know if all the hype is still worth it.

Amidst tariff turmoil and market uncertainty, technology trade continues to bring the S&P 500 high. With Mega-Cap Tech's earnings scheduled to kick off later this month, investors are looking for clues to see if AI fuel momentum can keep stocks higher.

According to Eric Sheridan, co-business leader of Goldman Sachs' TMT group, the launch of Deepseek, a cost-effective AI model from Chinese startups, was a “existential moment” of AI trade.

“The focus is on payoff or return dynamics,” Sheridan told Business Insider. “How do you see companies using AI? How do you see consumers adopting AI applications in their daily lives?

Does AI technology offer the promise to increase productivity and profitability? Investors will soon turn to the second quarter revenue season for answers.

Will AI Capex continue to skyrocket?

Big tech companies have poured billions into building AI infrastructure, and there is a lot of debate on Wall Street about how much more companies can spend.

As of February, Amazon, Microsoft, Alphabet and Meta's total AI investments in 2025 exceeded $300 billion, a marked increase from $246 billion spent in 2024.

Competition in the AI space is fierce as large technology companies compete to develop better large language models. And it's still in the early stages. In other words, this level of capital expenditure can continue into the future.

“There's still a pretty low visibility into what they're going to spend next year,” Sheridan said of the big companies.

“I wouldn't put a high probability on slowdowns,” he added.

Are companies making AI work?

A lot of money and effort is poured into AI tools for businesses, but investors want clear indications of what that means.

Investors do that Look for clues to call revenues that AI adoption is accelerating. They're not just interested or not nvidia We will strike the expectations of consensus. They are They are also looking for wider adoption of AI among other companies.

Investors have reason to be optimistic as there was green shoots in the previous months. Early indications of AI adoption are primarily manifested in the software industry as companies employ agent AI to autonomously complete tasks.

According to Bank of America, Russell 2000's company revenue calls have mentioned AI more frequently over the past few quarters. This quarter's revenue season is key to determining whether trends apply.

In June, Bank of America identified winners for software such as Microsoft, Salesforce, and ServiceNow. Banks expect monetization to begin taking off in 2026.

With Big Tech, there is pressure to show strong software margins.

“I think the background to AI is a huge stimulant for the revenue-wise cloud computing business,” Sheridan said. “And we're looking for some proof points around it throughout the revenue season.”

Are there any savings from headwinds in AI offset tariffs?

First quarter revenue was stronger than expected despite uncertainty related to tariffs. That's largely thanks to Big Tech, and investors are checking if the sector can lead to outperformance again.

Nadia Lovell, senior US equity strategist at UBS Global Wealth Management, believes that AI will continue to be a major driver of revenue growth across the S&P 500.

“Yes, there may be vulnerabilities, but we need to focus on secular, structural growth narratives like the power and resources of AI,” Lovell said at the Bank's Roundtable on July 8th.

Tariffs are putting extra pressure on AI trade as investors are digging into the company's margins and worrying about higher import costs.

Can AI use cases provide a shield against tariff headwinds? Jeremy Siegel, professor Wharton and senior economist at WisdomTree, believes that tariffs are especially beginning to show investors that they are using AI, dragging consumer sentiment.

“I think they'll have to do that soon in the face of some of these tariff prices rises,” Siegel told CNBC on Friday.

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