Artificial intelligence’s (AI) biggest spenders have now reported, leaving tech stocks in the midst of a broad selloff. A perfect storm of macro worries has not helped, with high oil prices, elevated bond yields and nerves around the US midterms all adding to the volatility.
But looking through the noise, we think that the underlying numbers tell a far more constructive story.
We think that although investors are fully accounting for the cost of the AI buildout, they’re giving only partial credit for the contracted revenue the investment’s meant to serve. That disconnect could be the opportunity.
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In this market, clean stories win
Microsoft delivered exactly what the market wanted to see: a clean quarter, with beats across the board and strength in both cloud and software. Alphabet and Amazon were strong, too, but each came with a few niggles, and right now that's enough to get punished.
As soon as a company has to start explaining away one-offs or near-term softness, this market sells first and asks questions later.
The valuation conundrum
When earnings expectations rise but share prices fail to follow, multiples contract. In effect, markets are voting, and the verdict is that they do not trust those forecasts to last. That's where we find ourselves today.
Average forward earnings per share has moved from $16.5 a year ago to $20.2 today. During the same period, the forward multiple has contracted from 27x to 21x. So, while expectations for the group keep climbing, investors are paying less for every dollar of expected profit.
Capex is the issue
We certainly do not dismiss company-specific challenges. But our aim here is to look beyond any single business and show why there's still a strong case for backing the AI trade.
With that in mind, we see AI investment plans as investors' biggest worry and the main reason (aside from macro concerns) that multiples have been squeezed.
At the start of 2026, the group was expected to spend a combined $520bn on capex this year. That figure now sits at $781bn, up 50%. The gap is even starker for 2027 and 2028, with 2028 capex expectations doubling since January.
Third quarter results did little to ease those nerves. Alphabet and Amazon both flagged significant capex growth in 2027, Meta plans to invest aggressively, and even Microsoft, despite trimming its 2026 figure, expects spending to accelerate next year. The question is not whether budgets rise but by how much.
With that backdrop, it's easy to see why spending concerns have taken hold, and we do not take those risks lightly.
Cloud provides the counter
If ramping investment is one side of the ledger, expanding order backlogs and huge cloud growth are the other. The key question is whether permanently lower multiples are justified, and we don't think they are.
The first proof point is last week's cloud numbers. Revenue growth at AWS sped up for a sixth straight quarter to 39%, Azure for a third to 48%, and Google Cloud for a sixth, with revenue more than doubling at 103%.
That growth is a direct result of the investment made during the past couple of years. And Amazon's earnings call pointed to strong demand visibility, with AWS expected to grow over 40% in both 2027 and 2028.
But it's one thing to think that the market is being too harsh and another to spot a tangible catalyst that could change the market’s view. In our view, turning backlogs (the value of future orders) into revenue is that catalyst and the biggest risk to our positive stance.
AWS offers the cleanest backlog number of the three, and it now sits at $578bn, up by triple digits on last year. That's contracted demand, not wishful thinking. So, the question is not whether customers want the capacity, it's whether the compute providers can get it built and switched on fast enough.
The demand is there, and execution on the buildout is now the test.
Key investor takeaway
There were some company-specific reasons for the post-results sell-offs across the cloud giants. But the broader weakness seen across the AI ecosystem appears to be driven more by market conditions and sentiment than by any shift in fundamentals.
For investors who already hold a diversified portfolio and have some risk tolerance, we think that this period of weakness has presented plenty of opportunities to add high-quality companies at attractive valuations.
The author holds shares in Alphabet and Amazon.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. These estimates are not a reliable indicator of future performance. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss. Yields are variable and not guaranteed.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.