The Big Tech earnings dilemma

0:28Hey, guys. It's Mark checking in from my time off. Good morning from the Financial Times. Today is Wednesday, July 29th, and this is your FT News Briefing. Ukraine has a new tactic in its war with Russia, and big tech companies are facing a dilemma as they report earnings this week. Can one of these companies get the mix right of strong AI growth without the overwhelming and terrifying AI spending? Plus, AI has been hallucinating all over reports from Big Four consultants. I'm Sonia Hudson, InfoMark Filipino, and here's the news you need to start your day.

1:17Ukraine has a new strategy for attacking Russia's energy industry. It's previously conducted broad drone attacks on refineries. Now, Ukraine is focusing on striking critical components that are hard to replace. The goal is to keep plants offline for longer and make each attack more costly for Moscow. This is all according to Ukrainian military planners, drone operators, and energy specialists. Russia and Ukraine inherited similar Soviet-designed energy systems. And that gives Ukrainian engineers a detailed understanding of Russian facilities. But it also means Russia has been able to use that same knowledge to hit Ukrainian energy infrastructure.

2:09Some of the biggest U.S. tech companies report quarterly earnings this week. Meta and Microsoft are releasing their results later today. And this all comes as global chip stocks are taking a beating. Investors are worried about how long the AI boom times can last. Here to tell us what these jitters mean for big tech is the FT's U.S. financial commentator, Rob Armstrong. Hey, Rob. Hey. So what did we see yesterday across global chip stocks? So what we saw is a pretty sharp sell-off in chip stocks that started in America, moved overnight to Asia, to Korea and Japan, where there's other large chip companies, and then came back around the world and hit chip stocks in America again yesterday.

2:57This is part of a larger story we've seen unfolding in the last two or three months, where first, the big so-called magnificent seven U.S. tech stocks surrendered their market leadership. After that, the semiconductors picked up at the baton and ran with it for a while. but now they've started to falter. So it's like, who's going to lead the market now? When everyone's wobbling. Yes. So, you know, all this turbulence is happening right in the middle of earnings season. What have we heard from big tech companies so far, the ones that have reported? And what are you expecting this week from Microsoft, Meta, Apple, and Amazon?

3:40Well, the one we have heard from is Google And their results very neatly encapsulate the dilemma that markets are facing right now. And Google or Alphabet, as the parent company is known, came out and said, well, we had great over 80 % growth in our cloud computing business, which is basically their AI business. But we spent even more billions of dollars than you thought we were going to building data centers and investing in this technology. And the market looked at that balance and said, we don't like it. And the share sold off. So what I think we're likely to see in the case of Microsoft, Meta, and Amazon is that dilemma playing out again.

4:25Can one of these companies get the mix right of strong AI growth without the overwhelming and terrifying AI spending? Rob, I'm also curious about the competition that we're seeing out of China. You know, we had the Chinese startup Moonshot release a really competitive AI model last week. There was also this blockbuster listing of a Chinese chipmaker in Shanghai on Monday this week. Do you think China's gains are starting to make a difference in the market? I think they are. If we think about those big U.S. tech companies again, these had some of the best and most profitable business models because they were almost impossible to compete with.

5:13With AI, we don't know who the winners are going to be. And when you see Chinese companies making great AI models or making brilliant AI chips, you think maybe actually this is going to be a nasty competitive business rather than the oligopoly or monopoly business these great companies used to be in. Well, lots of big existential questions about the future of the tech sector. But bringing this back to the earnings reports that we're going to see this week, you know, investors have been punishing companies by selling off their stock after they get news about a lot of spending on AI and these earnings reports.

5:52If that keeps happening, do you think eventually it will be enough to get these big tech groups to rein that in? It's interesting. The big tech stock that has done the best recently is Apple, which is sort of sitting out the AI investment wars. And you might think the other companies would look over an Apple and Apple's share price and say, hey, those guys have the right idea. However, I don't think that's going to happen. And I'll tell you why. I think the likes of Microsoft and Alphabet and Amazon believe that the alternative to competing in AI, even if it is a worse business than the businesses they used to be in, they believe the alternative is obsolescence.

6:40So in other words, they have a gun to their heads. It's AI or die, as it were. AI or die. You heard it here first. Rob Armstrong is the FT's U.S. financial commentator. Thanks, Rob. Cheers. Rob also co-hosts the FT's Unhedged podcast. So if you want to hear more takes like AI or die, we've got a link to that in the show notes.

7:10Google DeepMind is overhauling the research strategy that made it one of the world's leading AI laboratories. The company was focused on pursuing long-term scientific breakthroughs using dedicated research teams. It even won a Nobel Prize for AlphaFold, which used AI to predict the 3D structure of proteins. But over the past year, the company has been dismantling the team behind AlphaFold. A DeepMind executive told the FT that the company doesn't want teams solving singular scientific problems anymore. Instead, it wants to focus on building systems powered by its large language model, Gemini. The hope is that those systems can eventually automate parts of the research process.

7:55DeepMind said the reorganization reflected its evolving scientific priorities and that it's in line with a broader shift across the AI industry.

8:11PwC published reports on artificial intelligence that contained AI-generated misinformation. That's according to an investigation by the research group GPT-0 that was verified by the FT. PwC is the latest Big Four firm to come under scrutiny for failing to vet this type of content. Here to discuss is the FT's U.S. accounting editor, Stephen Foley. Hi, Stephen. Hi there. So, Stephen, can you tell us a little bit more about the investigation into these reports by PwC? What did it find? Yeah, so these are reports produced by PwC Middle East. They're thought leadership reports that are put out to try and drum up business for consultants.

8:54These are reports on the use of agentic AI by companies. They are about the use of AI by governments, about autonomous vehicles, electric vehicles across the Middle East. So these are big thought leadership pieces that are meant to be sort of flagship reports from this big four firm. But the researchers found that once you dug down into the footnotes, they were riddled with hallucinations. So many of these footnotes pointed to sources that didn't exist. There's academic reports that were never written, very strange sourcing and lots of errors. And what did PwC have to say in response to this investigation?

9:33Well, it tells us that it takes this kind of stuff very seriously. Accuracy is very important. It says that it has quality control processes for research that expects people to adhere to. But in this case, it's going to be updating a number of the supporting citations in the reports. So there have been some other investigations from this research firm, GPT-0, that found that EY and KPMG also published AI hallucinations. Why is this a trend that we are seeing across big four consulting firms? Oh, yeah, we've collected the full set of the big four now. EY retracted a study a few months ago after we reported some of GPT-0's research findings.

10:19KPMG had a report on the use of AI, which had case studies in it, who, when you called up the governments and the companies that were used as case studies, they said, no, that's all inaccurate. So this is a recurring theme. And I think it's because the consulting firms have been very forward in trying to encourage their staff to get to know the AI technology. They've been rolling out tools internally, and they've been very much encouraging people to work more efficiently and more accurately with AI. But as I say, These are new kinds of errors that perhaps require new training, actually, for junior researchers to make sure they know what they're looking for.

11:01What's the risk to these consulting firms if they don't figure out a way to better vet their AI-generated content? Well, look, it's embarrassing, right? Consultants are supposed to be brought in to advise companies how to do things. I mean, this is thought leadership trying to get them through the door to come into companies and talk to them about implementing AI. So there's a commercial downside to being seen to not know what you're doing here. Deloitte was discovered to have been putting out reports with hallucinations, not thought leadership reports, but actual research reports that it was producing for the governments in Australia and provincial governments in Canada.

11:43And in the Australia case, it paid money back to its client, the Australian government, because of the quality of the work. So there's commercial risks here. Stephen Foley, the FT's U.S. accounting editor. Thanks, Stephen. No problem. Thanks.

12:00You can read more on all these stories for free when you click the links in our show notes. This has been your daily FT News Briefing. Check back tomorrow for the latest business news.

12:13Thank you.

12:43explores how corporates and investors are navigating new pathways to raise capital, create value, and drive growth. When conditions change, alternatives matter. Listen to Strategic Alternatives, available wherever you get your podcasts. When your options are limited, so are your opportunities. At Cibo, the global exchange that pioneered options trading, we offer more ways to move with the market. From VIX and SPX options to global market data solutions. SIBO helps investors diversify, manage risk, and stay ahead of whatever the market does next. SIBO. Life is better with options. Your investments could be too.

13:20There are risks associated with SIBO company products. Review the disclosures and disclaimers at SIBO.com slash US underscore disclaimers.