AI giants face a reckoning after record spending

Global equity markets are up, but Q4 earnings season has begun, and the time of reckoning is here. Companies will either show strong profits now or volatility will surge to new highs… again. That’s the choice.

Valuations are already stretched to the max. The MSCI World Index is at 20 times forward earnings. That’s well above its 10-year median of 17. Investors are still holding on from last year’s 19% rally, which was basically priced on hope. If earnings don’t deliver now, this whole thing unravels.

AI giants under pressure to justify record spending

In the U.S., analysts think S&P 500 earnings rose over 8% last quarter. They’re also betting on 11% gains every quarter this year. Asia is stronger, with expected 14% growth in Q4 profits. Europe is barely in the green, with just over 1% growth. Nothing exciting there.

The first batch of results has been mixed. Big banks on Wall Street gave a weak read on the economy. In Europe, Richemont, which owns Cartier, disappointed. But Taiwan Semiconductor (TSMC) stepped in and gave global stocks a push. Their forecast on AI chips set off a rally on Thursday.

Everyone’s still betting on AI. That’s where the money is. The biggest companies on the planet are tied to that trade. No one expects huge flops from them, but cracks already showed up at the end of 2025. So now the pressure’s on. Other sectors like energy, health, and materials are being forced to catch up.

Let’s talk spending. Meta, Microsoft, Amazon, Alphabet, and Oracle plan to spend $530 billion this year, according to Bank of America. In Q4, profits at the Magnificent Seven probably rose 20%, four times what the rest of the S&P 500 earned.

Meta’s stock crashed 7% last quarter after its spending plans scared everyone, and Oracle got wrecked even harder, becoming the worst-performing Big Tech stock in 2025.

TSMC gave some relief. They projected between $52 and $56 billion in capex and nearly 30% revenue growth for 2026. Last year, their cash flow-to-capex ratio was 1.8.

Tariff cuts, oil threats, and 29x P/E defense stocks drive new risks across sectors

Away from tech, money is finally creeping into old sectors. Banks, consumer goods, and mining are getting some attention. If this rally keeps going, they’ll have to start pulling their own weight. They’re not just going to ride on AI forever.

Procter & Gamble and Johnson & Johnson are reporting this week. Traders want to know if U.S. consumers still have enough cash to handle rising prices and job losses. Richemont’s results already showed weakness in luxury. Now it’s up to companies selling basic stuff (soap, pills, toothpaste) to show the other half of the economy is still alive.

Last week, the U.S. lowered Taiwan’s tariff to 15%, which was meant to boost trade. But it also messed up every company’s forecast model.

Meanwhile, the Supreme Court is getting ready to rule on whether the old tariffs broke the Constitution. If Trump loses, the government might have to refund billions in import duties, which would, of course, blow up supply-chain plans across the board.

Then there’s Iran. Trump just threatened to bomb them. Iran controls the Strait of Hormuz, which is critical for oil shipments. At the same time, Venezuela’s president was captured by U.S. forces. Their oil reserves are now in play. No one knows where prices go next.

On the defense side, governments are throwing money at weapons. Germany, Japan, and Canada are all boosting military budgets. That’s sent defense stocks soaring. Companies like Rheinmetall, Northrop Grumman, and Hanwha Aerospace have been winning big.

Investors are watching results from Lockheed Martin, General Dynamics, and Saab. They want higher revenue and fatter margins. A UBS basket of U.S. defense stocks is up 17% this month. It’s trading at 29 times forward earnings. The European version is even more expensive at 32 times, way above the 5-year average of 17.

Back in Europe, companies have a lot to prove. They had 0% earnings growth in 2025. This year, analysts expect almost 11%. Most of that is expected from banks. Financial stocks are still cheap, and loan growth looks solid. UBS and Deutsche Bank will be closely watched.

For consumer trends, investors will look at LVMH, Kering, Volkswagen, and Mercedes-Benz. They’ll give updates on what’s happening in China, especially spending. That’s a key piece of the global equity puzzle.

In Asia, the picture’s cleaner. The CSI 300 Index is up 18% in six months. Earnings projections have also improved. Even with weak macro numbers and tougher e-commerce competition, analysts expect brokers, miners, and AI-related firms to post strong results.

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