HSBC says $470B capex bar for mega-cap tech sets up Q2 beat

Wall Street enters mega-cap tech Q2 earnings with the lowest expectations in two years, setting up a potential beat that could fuel a rally, HSBC's Max Kettner said.

"The business models of mega-cap tech companies have fundamentally changed in terms of taking on debt and being cash flow negative, but the real story is that expectations are now so low that any positive surprise will have real fuel behind it," Kettner, HSBC's chief multi-asset strategist, said on CNBC's Closing Bell Overtime on July 7.

The four hyperscalers — Microsoft Corp., Meta Platforms Inc., Amazon.com Inc. and Alphabet Inc. — are expected to boost combined capital expenditures to more than $470 billion in 2026 from about $350 billion in 2025, according to analyst estimates compiled by FactSet. Microsoft's fiscal second-quarter capex consensus stands at $36.25 billion, up 60 percent from a year earlier, while Meta faces nearly 57 percent growth to over $110 billion. Amazon's capex forecast of $125 billion for 2026 is the highest among the group, and Alphabet is expected to spend more than $115 billion.

A broad-based beat across mega-cap tech could reignite the Nasdaq 100 and S&P 500, which have lagged as investors priced in AI spending concerns. The S&P 500 declined about 9 percent from its January highs through late March as the Middle East conflict escalated, and the Cboe Volatility Index more than doubled during that period.

The earnings season kicks off this week with reports from Apple Inc., Meta, Microsoft and Tesla Inc., followed by Alphabet and Amazon next week. Investors will scrutinize whether AI revenue growth is pacing with the unprecedented capex commitments, a question that has weighed on sentiment since late 2025 when Meta's stock had its worst day in three years after lifting its spending forecast.

Microsoft's operating margin is expected to narrow to 67 percent, its tightest in three years, as the company ramps data center buildout to meet Azure AI demand. Meta's capital spending could reach $125 billion in 2026, Goldman Sachs estimates, rising to $144 billion in 2027. Amazon Web Services signed a $38 billion deal with OpenAI in November, its first contract with the ChatGPT maker, intensifying competition among cloud providers for AI workloads.

The broader earnings picture supports the case for positive surprises. S&P 500 companies reported 21.2 percent earnings growth in the first quarter, with 79.6 percent beating EPS estimates and 78 percent beating revenue estimates, according to Zacks Investment Research. Full-year 2026 S&P 500 earnings are expected to grow 19.7 percent, with all 16 sectors projected to post positive growth for the first time in years.

The lowered bar creates asymmetric upside for the sector, Kettner argued. If companies merely meet the reduced expectations, the relief rally could be significant. If they beat, the fuel for a sustained move higher is in place.

This article is for informational purposes only and does not constitute investment advice.