Big Tech to Spend $650 Billion This Year as AI Race Intensifies

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.

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1:02Bloomberg Audio Studios. Podcasts. Radio. News. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. We got another data point last night in terms of how the market views this tech CapEx. Amazon, they have to take the cake. $200 billion in CapEx. That's well above what the consensus was. Guess what? The stock is trading down today. So let's get a sense of kind of where this tech spending theme is for this sector.

1:42Mandeep Singh, he joins us here. He runs all the tech research for Bloomberg Intelligence. For those, Mandeep, that were looking for another data point to say, how does the market view tech spending? Did we get it last night with Amazon and now the stock trading off today? Yeah, I mean, this was as big as it can get in terms of, you know, a CapEx number out of the hyperscalers and probably because they went last in terms of, you know, reporting earnings. But look, I think had they not gone that big, the stock would have been up because they posted best AWS growth in the last three years. And, you know, sequentially things seem to be improving.

2:23It's just that$200 billion number and the fact that their margins are going down on the AWS side. That's why you see this kind of stock reaction. And there wasn't enough justification to, you know, ramp up CapEx by about 55 percent to 200 billion. Mandeep, how long are we going to see these massive increases in CapEx? I mean, this was for 2026 full year. I mean, are we going to see this for another two years, three years? or is there an end in sight, I guess, is the question? So based on our work, at least so far, we feel this is the peak CapEx growth. You will still see growth, but it's not going to be of the same magnitude.

3:06I mean, 2026, we are talking about a year where CapEx from the hyperscalers will grow almost 60%. So and last year we had 2024 to 2025 was also 70 percent growth in CapEx. So we have gone from 200 billion dollars of hyperscale CapEx to now 650 billion dollars. I think that growth rate will certainly come down. But there's no doubt that, you know, we are still in that part of the S-curve where, you know, there is more demand and everyone has called out supply constraints. and they would have grown faster had it not been for, you know, the limited supply they had for AI infrastructure. So, Mandeep, you talk to institutional investors all around the world here that focus exclusively on technology.

3:52Where are they? Has their narrative shifted about where and when and to what degree this industry should invest in AI? Has the fundamental view of AI and how this tech industry is going to get there, Has that changed among some of those big, big tech investors that are big shareholders in so many of these companies? Yeah, I mean, right now you see both, you know, anxiety and some sort of panic as well in terms of, you know, the level of free cash flow that's going to get hurt because of this spend and how fast it's happening. I mean, the cloud market grew almost, you know, 20 percent plus for a decade and everyone was fine.

4:32You could see, you know, predictable free cash flows. This is a very big upfront spend. And look, it makes sense that you have to spend first to build the infrastructure. But I think you really have to take a leap of faith that all these companies that are putting, you know,$200 billion will see ROIC for their spend. And I think that's where there are question marks that some of them may not have that level of ROIC. So I think that's what's reflected in the panic so far. But there's no doubt that, you know, workflows are changing and there are some real productivity benefits you're seeing out of this band.

5:12You know, we talk about these numbers and we throw them around like they're gospels. $650 billion from big tech this year,$200 billion from Amazon. I mean, it's kind of squishy at the end of the day, Mandeep, because this is a lever that companies can toggle. So I wonder how reliable they are. Ryan Horan, who is one of our listeners, wants to know, is the risk to hire CapEx from here or is it more that hyperscalers can pull back on what they say is their CapEx plan? No, that's a very good point. And look, a company like Apple so far has resisted the urge to spend on CapEx now that they are leaning on Google.

5:49So that's where, you know, a Google raising CapEx made a ton of sense this earnings season because, one, they saw that steepest acceleration in cloud, in fact, next year could be 60 % growth in their cloud segment. And also, Anthropic and Apple are new customers, you know, in terms of who will be using their compute. On the other hand, for an Amazon, you have to ask yourself, is OpenAI the buyer for all of the compute that Microsoft is spending on, you know, Amazon is spending on, Oracle is spending on? Because it's going to come down to a handful of, you know, foundational model players. Meta is on its own.

6:29It's spending. But it's not very clear. OpenAI needs all this compute. Stay with us. More from Bloomberg Intelligence coming up after this.

6:41You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. Under Armour, one of the companies that reported earnings and in line with the gains in the broader market, the stock is up 11 percent right now. This is a company that is still very much in restructuring mode. Poonam Goyal is our senior U.S. e-commerce and retail analyst here at Bloomberg Intelligence, and she's got more on this. So how low was the bar or did Under Armour knock it out of the park with this latest report that has its stock soaring 11 percent?

7:22I'd say the bar was very low for Under Armour. There's been a lot of conversation about will this turnaround take place? Will it be a sustained turnaround in the past few months, especially with the loss of Steph Curry? So I think the bar was low. They did post respectable numbers. I'd still say that I'm still not completely sold on the story. Their biggest region, the U.S., North America, sales were down 10 percent. They're expected to be down 8 percent in their fiscal year. So things aren't still, you know, where we want them to be. And I've heard this narrative so many times where they kind of take out the low hanging food, get the inventories right, get back into the right wholesale doors, we're repeating that.

8:06So for me, it's a wait and watch situation still. When a brand like this loses a spokesperson like Steph Curry, how material is that of a loss to the financials? It's material for basketball, right? If Under Armour is trying to make a stake into basketball and really compete with the Nike and even the Adidas or Pumas of the world, which have renowned basketball players supporting their brand, Nike notably so, the loss of Steph Curry is going to be a headwind. We estimate what we've seen just by industry estimates is it's more than a hundred million dollar franchise that Steph Curry had with Under Armour.

8:42So that's obviously now not going to be there. So we've also heard that the Warren Buffett of Canada, Fairfax Financial, has disclosed a roughly 22 % stake in Under Armour. This came out about a month ago. How does that change how the company operates, how it moves forward? Do we presume that Fairfax is going to be an activist investor or have some ideas on what Under Armour does? I'm sure they'll have some ideas. Right now, what we're seeing Under Armour do is follow the retail 101 playbook on a turnaround, which is let's get out of off price. Let's start selling more full price. Let's pick our wholesale doors and let's get product innovation front and center in front of the consumer.

9:27The question is right now that they can do that because they have very easy comparisons from prior years. As they begin to recoup and reset the bar, can they continue to grow and compete with the larger players, notably Nike and Adidas? And can they make a claim for their brand without leading sports personnel? Amazon also reported last night stock trading off people not real psyched about $200 billion of CapEx, I guess. But how did the retail business do? The retail business did very, very well. I think they're continuing to gain share. We saw an increase in online retail sales, low double digits that was impressive and show share gains i think what's really neat about their retail business right now is all the investments that they're making in ai especially rufus you know it was interesting to me and i guess i hadn't known this is that rufus can now execute an order for you and and that's pretty cool if i say i want um you know this uh stereo for a hundred dollars so watch the price when it gets to a hundred it just buys it for me that's that's a new way to shop.

10:36And they're definitely leaping forward into AI and making the bets with Rufus and Alexa Plus, which I thought were pretty interesting. I guess these would all be kind of value-added services from Amazon. Does that mean that they're going to start raising fees for Amazon Prime, for instance? You know, they've raised fees periodically. They're not ones to raise fees every year. So every several years, do we see a slight bump in price? We have, and the fees have gone up in the last 10 years, 15 years, quite substantially. But I'd say they're also giving you a lot more, right? With Prime Video, with just other things.

11:15They make the Prime membership, if you were ever to unbundle it, it's quite a great value that you're still getting. And they talked a little bit about Everyday Essentials now just being a bigger focus for them it's surprising and it's it's mind-boggling actually that it's 150 billion gmv business for them um that's pretty significant that one out of three purchases are everyday essentials that just means that you're going to amazon for everything that's their white label brand right yeah everyday essentials i don't know it's like their supermarket brand i think so so 30 seconds left here put them based upon amazon maybe some other retailers you've heard from how's the consumer doing?

11:56A consumer is doing just fine. You know, we have been waiting to see if the consumer will crack. We haven't seen that yet. The consumer is shopping, but they are being mindful and they're watching where they spend and how they spend it. So this is where brands like Amazon and the large retailers that have the power of scale to keep prices low do well. Stay with us. More from Bloomberg Intelligence coming up after this.

12:23You're listening to the Bloomberg Intelligence podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. Philip Mars, they had some pretty good numbers and the stock's done well. Double digit return this year, plus I got a 3 % dividend yield. It's a consumer staple and consumer staple is in right now. Ken Shea joins us, senior consumer products analyst at Bloomberg Intelligence. Tell us about Philip Morris' quarter and what's their business outlook, Ken? Yeah, hi, Paul.

12:59Philip Morris had some good numbers today. It's fourth quarter, pretty much came in line. Sales up about 7%, EPS about 10%. Those are pretty good numbers for a consumer staple company. They hit their numbers. Stock is performing well, probably as a result of that. But there's two other big takeaways, I think, beyond that today that's maybe helping investor enthusiasm here. The second is the financial guidance they provided for the next three years, or I should say through 2028, is also pretty positive. They see mid to high single-digit revenues, around 10 % operating income, low double-digit EPS growth.

13:39Those are pretty good numbers for big consumer product companies, particularly companies that deliver like this one. And even though those numbers are pretty much in line where the street was already at, nevertheless, I think that should be viewed pretty positively. And the third is the company said today, repeating what they said in December, they're going to start providing more financial transparency behind what they call their smoke-free business from their traditional cigarette combustible business. And I think that's going to help. More transparency is always welcomed by investors in the market.

14:12And so I think all three things are really what's behind today's action. So talk a little bit about that smoke-free product line. Where is the growth the fastest and how much spending, how much investment is needed for us to see that return that investors want? Hi, Scarlett. Well, Fillmore really took a big step before its peers when jumping into the smoke-free opportunity years ago with what it's calling IQOS. iqos that's its flagship family brand i guess you can call it uh it's pretty much sold around the world pretty much in most of the markets that it sells cigarettes and it's already comprised more than half its sales in some pretty big markets japan south korea and some others so it's really caught on well and basically what it is it's a it's a device like uh it's a device that you use to get the facsimile of a cigarette smoking experience, but you use little plugs you put in it.

15:13So the business is really selling the plugs once the device is in the hands of the consumer. That's doing really well. That's the biggest piece of that business. The second is it's what I call this nicotine pouch business. In the U.S., people probably know it by Zin. It's around plastic can. People put their pockets, and they can very discreetly get their nicotine hit that way. It's been really popular, doing really well. And the third, kind of more of a distant business for them, but one they want to be in, is their e-cigarette business. They call it the closed pod system, sort of like the Juul.

15:46Their brand is called Veve. It's kind of a low-end, low-price point way for consumers to get their nicotine fix. But it wants to be in that business because it wants that brand to be out there as an alternative to smoking. So just real quick there, is that where the growth is for this company going forward in the broadly defined smokeless part of the business? That's right, Paul. It's already around 42 % of their sales. Believe it or not, not a lot of people in the U.S. know about it because Icos really isn't sold in the U.S. yet. They're waiting for FDA authorization to roll out its Aluma Icos system.

16:26Then people will really know more about it in the U.S. But it's, yeah, over 40 % of their business, it's over$16 billion in sales. So that's why they're bringing transparency to that business. It's a big business. You know, I think what they're implying, I think, down the road is that maybe they can separate the business, that is, the combustible business, from its smoke-free because they have different investment characteristics. Stay with us. More from Bloomberg Intelligence coming up after this. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App.

17:08Listen on demand wherever you get your podcasts or watch us live on YouTube. Well, it is here February time and on Wall Street. That is bonus time, folks. You want somebody's attention on Wall Street? It's like, bonus. Bonus. Exactly. To be honest with you, having worked on the street for 30 years, the bonus discussions around the water cooler start right after Labor Day. And you start talking about what the bonus pool is, and then you start cornering your manager from September right up until year end, because that's when the bonus pool kind of gets decided. And you say, hey, good deals, good trade, you know, all that kind of stuff.

17:44And so it starts working right after Labor Day. That's how the season works. This year is going to be a good year. Goldman, JPMorgan bankers see bonus pools rise at least 10%. That's pretty good. Catherine Daugherty joins us, finance reporter for Bloomberg News. This is the big take story. And not surprisingly, it is like one of the most highly read, most read stories on the Bloomberg Terminal today, because who is our readership? It's the folks that get paid by Wall Street, Global Wall Street. Catherine, talk to us about kind of the bonus environment these days for Global Wall Street. Yeah. So, I mean, 2025 ended on a strong note.

18:14And the year ahead looks to be the momentum in terms of deals and trading. Both of those things is feeding into that bonus pool that you talk about. So in terms of the trading desks and M &A specifically, M &A has been, for investment bankers, the tepid environment that payouts have not been terrible, but you haven't seen this double digit rise in that part of banking in a few years. Really, 2021, 2022 were like the banner years for investment banking. Now we're starting to see more momentum that bankers are getting paid for the deals that they're putting the time and energy into. And for trading, volatility has really driven up revenue across the big banks.

19:02They're fulfilling more client orders. And because of that, the trading desks are getting paid for it. I need numbers like give me an average. And then for a rainmaker like Paul, what would it be? So average 10 percent. And we've been reporting for specifically J.P. Morgan, Goldman, Bank of America. Now, within those banks, there's some variation. We were trying to find kind of the general average. And for the rainmakers, to answer your question, some of those are going up to the 20 to, I had heard some rumors of 30 % for the like real dealmakers. Give me like a dollar figure, though. So, I mean, these bonuses, it really varies by bank.

19:48But if you think about the base salary, it's the bonus on top of your base salary that usually is the sweetest part of payout. It's going to depend on what stage of career the banker is in. If they're further along, it can stretch into the millions of dollars. And it's the bonus that could be the millions part and not necessarily your base salary. So again, that's the performance based. How did your year end up? And then your salary is just the thing that's on the bottom of it. What has changed since my day was my day, my bonus was 90 to 95 % of my year end comp. My total comp was my bonus. So your salary was like 5, 10 % of your total ticket.

20:32Now that's changed. It's a higher percentage now. Your salary was your beer money. Exactly. It's exactly right. But you try to live on your salary and you save your bonus. That's the that's what or if you're other way, you just blow your bonus. Both four kids. I was in the save mode. But as that changes or higher base now these days, maybe a lower percentage. I do think that I mean, that percentage that you just shared, I think the percentages, yes, have have grown where bonuses are not 95 percent of your pay. That being said, the shift is still towards bonus over salary for many of these firms.

21:10And again, that is why there's the incentive to work hard that phrase of eat what you kill. Is the bonus also a retention sort of thing that retain your talent? You know, you don't want to lose this guy or woman to some other firm. So that's a huge, that's like the fine line that the banks need to walk is you want to pay your best talent. But they're also under a lot of pressure to keep their expenses in check. When these are public companies, they're reporting to their analysts and to the investor community and saying, hey, this is how much money that we're making. The profit that the banks made in 2025 was the strongest that we have seen in a while.

21:50So presumably they should be able to pay out their people for it. But they don't want to pay out so much that then their expense line is going to be under scrutiny and they're going to be held to a higher standard in future quarters where they're going to start answering questions like, you know, why is the expenses much higher than you projected or you have talked about in previous quarters? I'm going to develop an AI model to come up with the calculation for bonuses. I'm sure that this is something that, yes, they've already implemented for that. For the junior bankers listening out there and watching, here's the strategy.

22:25You go in with your deal sheet. This is the fees I generated this year. You got to pay me. As more important than that is going with the deal sheet for next year. These are my anticipated fees that I think I'm going to bring in. And you don't want to lose me. You don't want to make me unhappy because this I think I can bring in. It's all about the year ahead. And that's how you do it. So real quick, 30 seconds. European banks don't pay as much as the U.S. banks, right? Not typically, but that's just because when you think about the U.S., you have the New York market. So you're going to see higher salaries.

22:57And the U.S. banks, I think, are on a stronger foot right now in terms of the profit that they're pulling in. So those are the kind of the things you need to think about. This is the Bloomberg Intelligence Podcast, available on Apple, Spotify and anywhere else you get your podcasts. Listen live each weekday, 10 a.m. to noon Eastern on Bloomberg.com, the iHeartRadio app, TuneIn, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal.