Has the AI Reckoning Arrived?

0:00Hello, I'm Stephen Carroll. I'm in Brussels where many of Europe's biggest decisions get made. And I'm Caroline Hepker in London with the hosts of the Bloomberg Daybreak Europe podcast. We're up early every weekday keeping an eye on what's happening across Europe and around the world. We do it early so the news is fresh, not recycled and so you know what actually matters as the day gets going. From Brussels, I'm following the politics, policy and the people shaping the European Union right now. And from London, I'm looking at what all that means for markets, money and the wider economy. We've got reporters across Europe and around the globe feeding in as stories break So whether it's geopolitics, energy, tech or markets you're hearing it while it happens It's smart, calm and to the point And it fits into your morning You can find new episodes of the Bloomberg Daybreak Europe podcast by 7am in Dublin or 8am in Brussels, Berlin and Paris On Apple, Spotify, YouTube or wherever you get your podcasts

1:02Bloomberg Audio Studios. Podcasts. Radio. News. There's a closing bill for this Tuesday on Wall Street, where a renewed tech sell-off dragged down stocks from near record levels. AI anxiety is coursing through the stock market right now. The Nasdaq 100 fell more than 1 % Tuesday, as investors pulled back from tech and tech-adjacent stocks. Katie, I'm not sure what to make of the price action today. Yeah, pairing losses, but still we're down nine tenths of a percent on the S &P 500. Even more when you take a look at the NASDAQ. Last week was topsy-turvy too, after some of the world's largest tech companies released their latest quarterly earnings reports.

1:46And investors processed the results. Apple earnings, really beating it out of the park when it comes to the quarterly earnings. Microsoft having a very hard day. Biggest drop since March of 2020. $400 billion of market cap shared. Shares of meta platforms are surging 7.5%. These reactions might seem all over the place. But Bloomberg's big tech editor, Sarah Fryer, says there's an underlying anxiety that explains them all. It's all about this existential question of are we spending quickly enough on AI? Are we spending too quickly? And can we afford what we're spending on this massive infrastructure build out?

2:29Last year, investors were willing to be patient with companies who were taking big swings on AI, building out huge data centers, filling them with expensive technology and hiring lots of pricey talent. Now, investors want to see big results. investors are looking not just at this spending, but also at, you know, are we seeing some return on investment? And are the legacy businesses growing fast enough to support that investment? Sarah says all this pressure is putting tech companies in a bind. If they spend too much without the cash flow or the customers to show for it, their stock could take a hit.

3:12And if they spend too little, they risk falling behind. I think this is the year where the chips are going to fall. We're going to find out if the spending that's occurring on AI is going to result in real change for these businesses. What are you going to build with this investment in AI? I'm Sarah Holder, and this is The Big Take from Bloomberg News. Today on the show, the AI reckoning is coming. Why pressure is building on tech companies to prove all their AI investment will pay off big and soon.

3:53If you're looking for evidence that investors are getting antsy about all this AI spending, just look at the reaction to Microsoft's earnings last week. The company reported what would typically be considered solid results. CEO Satya Nadella says total sales increased 17 percent to more than$81 billion in the quarter. But when investors read between the lines, they saw a red flag. The company said it was planning to spend more than$100 billion this year, even as the growth of a core business, cloud computing, had slowed. Investors wanted out. The Microsoft move yesterday was incredible. the second biggest drop in market cap that we've got for that stock.

4:38Microsoft's stock price tumbled 10 % the next day. In two sessions,$380 billion in market value was gone. This was a dramatic one. Bloomberg's Sarah Fryer. Microsoft actually ended up dropping the most in six years the day following this report, which showed that their cloud business was slowing, And therefore, their massive spending on AI infrastructure was a little suspect. Investors were uncomfortable with that. Investors want to make sure that other parts of Microsoft's business continue to grow to help fund these massive investments in AI. And they also want to see the company find ways to put AI to use to drive even more growth.

5:22There was a lot of scrutiny around how much have customers taken on Copilot? How much is Microsoft's integration of AI into everyday tools resonating with customers? And if the cloud business slows or if their growth is not as high as expected, that gives people pause. Well, I want to talk about Meta, too, because that company is also making massive investments in AI. It's projecting it'll spend between$115 and$135 billion in 2026, which is nearly twice what it spent in 2025, which is already a record spending year for the company. So how did investors react to that news? Were they similarly spooked?

6:04You know, it's interesting because in this report, they were not spooked. In prior quarters, they have been spooked. And it all depends on how quickly the ad business is growing. So in this quarter, the ad business grew quite well. And so investors looked at that higher spending projection, which is, as you note, a record insane. And they thought, OK, that's fine. Meta had warned them that it was going to be significantly higher than past years. So it was sort of expected. But what was maybe not as expected was how well the legacy business would perform. and specifically how much it had been optimized by the implementation of AI into making the algorithm better to show people posts that they might care about, to show people ads that are even more personalized than ever before.

6:54So it's using AI to basically guess what people will want to see in their advertising. And they're also using it to make the feed better, to make the content that you see as you scroll more personalized. So forget about followers and following. It is all algorithmically determined to entertain you. The more you scroll, the more ads you see, the more effective Meta's ad business is. So investors saw that. They thought, great, AI must be not just contributing to their future prospects, but with their current business, We're seeing it really have an effect on how well they can perform. It seems like what you're describing is a tale of two tech companies here, right?

7:41Meta, Microsoft, they're both spending a lot on AI. They're producing different results and investors are reacting differently. What does this tell you about where we're at in the AI race right now? I think that we are at this point where in order to have a return on investment on all of the billions, the hundreds of billions, maybe even more than a trillion dollars that is going to be spent on the AI build out, businesses need to become that much more productive. They need to continue to accelerate. We need to look at these tech businesses that have been growing at unprecedented levels for the last two decades and expect them to grow even faster, even more, get even bigger in order to justify all that has been promised.

8:29AI is such a dramatic industry-shaking force that, sure, why not? Why couldn't they get that much more productive? Or you could look at it and say, like, everything has already been so optimized and incrementally improved quarter over quarter. Can this really continue? Can we really get that much more value out of the businesses via AI and that much more value to these businesses' customers, especially in cloud, just by hosting and helping them improve what they do with these AI tools? What about the rest of the Mag7? We got Apple's earnings late last week. How did they fit into this narrative?

9:12How much is Apple spending on AI? And how did that land with investors? Well, I think Apple has really fallen behind on their plan to integrate AI. You know, Apple intelligence is not that intelligent. And people are looking at this company that has been such a leader in the tech space in other ways, had an amazing holiday quarter with iPhone sales. They did well in China. I mean, it was really like a striking quarter in the traditional Apple business sense. But that AI question is like looming over the company's future, which is maybe why the share response to Apple's earnings was not as celebratory as you might have expected.

9:58And they're really going to be leaning on Google, on Gemini for the future of their AI business. You know, they're saying they're going to still develop some stuff in-house, but that hasn't gone so well up to this point and they need help. And so I'm curious when Google reports if we'll hear more about that Apple deal, my guess is we probably will not. But that's something that we're certainly going to be keeping an eye on. So, I mean, you've talked a little bit about the positive signs that investors are seeing in these earnings reports. But I'm wondering, like, does what these companies are spending their money on matter to investors?

10:34Are there kinds of AI investments they're more comfortable with or less comfortable with? And what determines that? Well, so far, the most expensive aspect of the AI build out is the data center. And I think that investors understand that there needs to be this massive infrastructure build out. The problem is we might just run out of real estate. We might run out of chips. We might run out of water, of power. We might see more resistance to data centers. We might see more resistance politically to data centers. It might become a big issue in the midterm elections. So I think that while these deals are getting announced, like this may be the beginning of a year of reckoning on like, is that capital really possible to deploy at the rate that companies want to deploy it?

11:23It's really difficult to imagine that all of the promises about how much will be spent can be spent in that time frame. Why investors' AI nerves have spread beyond the MAG-7. That's next.

11:45We've been talking a lot about investors' anxiety that big tech companies' investments in AI won't pay off. But they're also anxious about what will happen if they do. The company Anthropic unveiled a new AI-powered automation tool for legal and data services, able to read through legal briefs and contracts with ease. And that's shares of Experian, Thompson Reuters, LegalZoom, the London Stock Exchange Group and other legal software. On Tuesday, after the AI startup Anthropic released a productivity tool for in-house lawyers, investors started dumping stocks of legal software and publishing firms.

12:23Thompson Reuters Corporation was down 16 percent and LegalZoom.com plummeted 20 percent. That sparked a broader sell-off across the software sector. And Bloomberg's Sarah Fryer says this could be a sign of what's to come. Well, we have seen some skepticism around software companies, that building software has become somewhat democratized, that anyone can do it if you have the right kind of coding companion. And so do you really need a Salesforce, SAP, any of these big software companies that are selling this big enterprise software? Are you really going to need the services of these companies that have grown into large enterprise businesses selling to corporations that want to make their processes more efficient with their software when you can use AI for that or you can build your own internal tool that might be more effective?

13:20So I think that there's going to be a lot of skittishness as we see AI tools hit the market around companies that make those tools or that provide those services, whether they'll still be necessary. As investors and the public try to measure how big a threat AI poses to these software companies, they're also trying to measure how valuable the AI winners could become. What kind of results really matter here? Like what are investors looking for to prove all the spending is worth it? One metric that I'm looking forward to hearing more from Google, sometimes they say how much of their code productivity has come from AI.

14:05And that's like something that investors look for as a sign of like how good is AI coding getting? Another thing that investors have looked at is Meta talking about AI specifically affecting its ad business, making the ad business way more effective, especially considering Meta can't get the same data on mobile users as it used to under Apple privacy rules. They've still been able to overcome that and have an even more effective ad business just using AI. So I think that when investors see changes like that, that are directly attributed to AI investment, that gets them excited. And when they see businesses deploy or say they've deployed AI and not have that much of a change or not even had to hire fewer people or been more efficient, then they get really nervous that this is all kind of a hype cycle.

15:01Sarah says something that could make things even more interesting this year would be the entrance of more publicly traded AI players. OpenAI and Anthropic are both eyeing IPOs, and Elon Musk's SpaceX had been planning one too. On Monday, Musk announced that SpaceX will be merging with XAI, which makes the chatbot grok, in a deal that values the combined company at$1.25 trillion. A person familiar told Bloomberg that the company still has plans for an IPO later this year. Well, it means that if you want exposure to a fast-growing AI company, you have another option. So that could affect the investment in Microsoft, Amazon, Google, Meta.

15:49It also means that we'll get so much more transparency about those businesses. Those businesses have been spending like crazy, growing like crazy. What's their plan for making money down the road? Are they going to be making money down the road? Or are they going to continue spending at that level for such a long time? XAI needed to merge with SpaceX in part because the cost of running an AI business is so high, so resource intensive, so talent intensive, that honestly they need the cash flow that SpaceX has in order to keep going. And they need the fundraising event of an IPO, even for the richest man in the world.

16:31You need some money. Is that a bad sign? What does that say? I think it just says that either investors are going to have to get used to businesses that just spend way more than they make in the hopes that they will one day have an epiphany moment or those businesses are going to have trouble once people see their balance sheets. But, you know, there are companies like Amazon in their early days who didn't really have a profit for a while and Meta, you know, they had this thesis in the beginning. We want to have a lot of users for this product before we even add advertising. So it's not unheard of in tech for a business to not make a ton of money when they're trying to grow fast.

17:15In fact, some people would say spending on growth is the smart thing to do right now when you're trying to be the main choice for consumers as people are coming on to using this product for the first time. That doesn't mean that it's going to last forever. We've been talking a lot about the risks and rewards for tech companies, but the Mag7 is essentially propping up the entire stock market right now. So what are the consequences if these bets don't pay off long term? I think we will all feel it. There are a lot of things that are shaky about our current economy. And there's that saying that the stock market is not the economy.

17:55But I think a lot of people do feel that way when they look at their 401k, when they look at their accounts, like they see their stock is going up. And so even when everything's getting more expensive, even when it's hard to find a job, there's that. And it also could really affect what happens in the midterms. We could see a reckoning there. But, you know, this is a global story. It could also affect U.S. versus China long term. These companies, one reason that they've gotten such leeway from the administration to do what they're doing is because the U.S. wants to get ahead of China and the AI race.

18:37Well, so, I mean, looking forward, how do you expect 2026 will compare to 2025 when it comes to AI and the AI race? How critical will this next year be? I think 2025 was a year of announcements of standing alongside Donald Trump at the White House and saying we're deploying 600 billion over this many years on AI. This is going to be a year of like, OK, so what now? Who's getting that money? Are you spending that money? And is it going to work?

19:35Thanks for listening. We'll be back tomorrow.