The Great AI Squeeze: High Costs To Weight On Earnings Reports

• Amazon stock fell 7% after missing Q4 EPS estimates by two cents and announcing $200 billion in 2026 capex, while Alphabet's stock softened despite record $400 billion annual revenue after forecasting up to $185 billion in 2026 spending
• Software sector experienced a selloff led by Salesforce and Adobe due to concerns that new AI agents like Anthropic's legal-tech tools could replace traditional SaaS subscription models rather than complement them
• Apple and Qualcomm warned about rising memory chip costs impacting margins, with Apple noting the impact will become 'a bit more significant' in coming months as AI infrastructure consumes high-end memory supply

Summary: AI Infrastructure Costs Pressure Earnings and Software Sector

Key Earnings Metrics:

With 59% of S&P 500 companies reporting Q4 2025 results, earnings per share (EPS) growth stands at 13%, while revenue growth is 8.8%. This week, 1,662 companies are scheduled to report, including McDonald's, Cisco, CVS, Shopify, and Coca-Cola.

Major Capex Concerns:

Big Tech's AI infrastructure spending is creating market anxiety. Alphabet reported record annual revenues exceeding $400 billion and 48% Google Cloud growth, but projected 2026 capital expenditures reaching $185 billion. Amazon followed with disappointing Q4 EPS of $1.95 (missing estimates by two cents) and boosted its 2026 spending forecast to $200 billion, resulting in a 7% stock decline.

Software Sector Selloff:

Traditional SaaS companies like Salesforce and Adobe experienced significant declines amid fears that AI agents are replacing, not complementing, their software products. Anthropic's legal-tech releases intensified concerns about AI disrupting traditional subscription models.

Supply Chain Pressures:

Qualcomm and Apple warned about rising memory chip costs. Apple absorbed increased costs in Q4 but expects "more significant" impacts ahead, as AI infrastructure consumes high-end memory supplies.

Sector Performance:

Information Technology and Communication Services lead growth, while Consumer Discretionary and Healthcare show year-over-year EPS declines. Energy is the only sector with projected revenue decline.

Market Implications:

Investors are scrutinizing whether massive AI infrastructure spending will generate returns or erode free cash flow. This week's reports from Cisco, Applied Materials, Shopify, and consumer giants will test whether AI benefits extend beyond Big Tech to justify record-high market valuations.