Big Tech is preparing to report its earnings. The results could make or break the AI rally.

• Is AI going to make tech firms big returns? Investors will soon find out.
• This week, Amazon, Apple, Meta, and Microsoft all report earnings.

For a while now, AI stocks have seemingly had the ability to defy gravity. We're about to find out if they can do that for much longer.

This week, tech companies central to the generative AI boom, including Amazon, Apple, Microsoft, and Meta, report earnings at a time when the market rally they've helped drive teeters on the brink of a correction.

In recent weeks, US markets have suffered, with the S&P 500 enduring its worst day since 2022. The tech-heavy Nasdaq-100 was also down, off the back of quarterly results from Tesla and Google parent company Alphabet that suggested AI was far from delivering returns that match the hype.

Tesla, which has delayed its reveal of AI-enabled robotaxis to October, reported a 45% slump in net income to $1.47 billion in its latest quarter, falling well short of analyst expectations.

Google, on the other hand, reported a 13.5% year-on-year quarterly revenue jump to $84.7 billion, but its chief executive Sundar Pichai left investors guessing how much of its huge capital expenditure on AI chips, data centers, and more was translating into returns.

If its Big Tech peers also struggle to tell investors that AI isn't just sucking up cash, we might see the AI rally lose some steam.

AI hype faces a major test

The rationale behind why AI stocks have been able to defy gravity is pretty simple.

Companies across Silicon Valley directing the vast majority of their time, resources, and investment toward generative AI have talked up the technology as something that will shake up the lives of industries and consumers for the better.

Nvidia CEO Jensen Huang, whose company's chips help power the large language models behind AI applications like ChatGPT, said last month that "generative AI is reshaping industries and opening new opportunities for innovation and growth."

Meanwhile, when Apple revealed its AI platform, Apple Intelligence, last month, its CEO Tim Cook described it as a "new chapter in Apple innovation" that will "transform what users can do with our products — and what our products can do for our users."

For some time, investors have bought this kind of rhetoric. Since March, gains in the S&P 500 have been driven by chip firms like Nvidia and the so-called "Fab Five" AI Big Tech stocks, including Alphabet, Amazon, Apple, Microsoft, and Meta.

They have done so while acknowledging that AI is an expensive technology to develop. The costs of infrastructure and research are heavy, as Google attested to last week as it reported capital expenditure in its last quarter almost doubled year-on-year to $13 billion.

But heavy expenditure without any signs of returns on the horizon won't cut it for much longer, as Google could also attest to.

In Amazon's case, that will mean showing some positive noise and substance around its work on its own AI chips, called Trainium, as well as growth in its cloud business integral to customers who need computing power to train AI models.

Apple will face less pressure as the impact of Apple Intelligence on sales of iPhones, iPads and Macs will only start to come to light once the AI platform begins its rollout towards the end of this year.

Meta's Mark Zuckerberg will likely face questions again about the company's AI spend, as he did at its last earnings, after raising guidance for the year's capital expenditure from around $37 billion to $40 billion.

Microsoft's Satya Nadella, which as invested billions of dollars into its partnership with OpenAI, will also face questions about how its AI tools like Copilot are fairing.

There are strong expectations among some that tech firms will generate returns in the long run. In a research note last week, Wedbush analyst Dan Ives wrote that while the sell-off last week was "brutal," this was "not the end of this tech bull run."

That may be so, but there's no denying that tech firms are spending a lot of money in the name of AI. Those betting big on them will want to see that investment pay off sooner rather than later.