Stocks head into the second week of August at record highs, thanks in large part to booming earnings. Strategists point out that S&P 500 earnings are nearly doubling the already-strong expected pace of growth.
In the background, the cloudy July jobs report didn’t offer much guidance on the economy. Still, bond traders have pared back expectations for a Federal Reserve interest rate hike in September. If the July Consumer Price Index report shows inflation softening, economists say that could solidify forecasts for a hold in September. Still, a rate increase is seen as possible before year-end.
In this week’s markets brief, we look at a key issue for Big Tech: the changing investing dynamics around the massive increase in AI-infrastructure-related spending. We also look at the yen’s slide, and why the US and Japanese governments have stepped in to support the currency. Plus, we have a preview of the upcoming CPI report.
Capex Divides
When it comes to the billions of dollars that hyperscalers (Amazon AMZN, Microsoft MSFT, Alphabet GOOG/GOOGL, and the like) have been plowing into the AI buildout, investor sentiment has swung back and forth. The concern is whether all that investment will actually deliver the kind of return embedded in stock prices. For much of this year, there has been skepticism about whether there will be meaningful payoffs. When Alphabet reported earnings in mid-July, the stock tanked on the company’s increased capex.
But views have been shifting, according to Morningstar equity analyst Malik Ahmed Khan, who covers Alphabet. “The market is increasingly becoming convinced that the cloud providers will generate a solid return on these AI investments,” he says. “It clearly did not have this view when Alphabet reported, but after Microsoft and Amazon’s reports, and the management teams’ data-driven arguments that the ROICs on these data centers were solid, the market seemed convinced.”
Morningstar senior equity analyst Dan Romanoff notes that Amazon described its data center return profile as essentially breaking even in three years. “The buildings will be used for decades, while the servers will be used for five to six years or more and generate substantial returns,” he says. Plus, investors found good news in Amazon’s strong AWS performance, good overall results, in-line guidance, and “capex plans that were not going higher—strategically, anyway.”
Meanwhile, Romanoff observes that Microsoft lowered its 2026 capex estimates to $175 billion from $190 billion. That didn’t reflect any change in strategy, but rather an accounting change around the value of buildings. Meanwhile, investors “liked the fact that capex estimates were not going higher.”
Then there is SpaceX SPCX and Facebook parent company Meta Platforms META, where investors have been giving a thumbs down on high capex. “The market is mostly unconvinced of Meta’s AI opportunity. The firm is spending similar-ish amounts as the others, but [it] does not have a cloud business as a direct monetization vehicle,” says Khan. “Our view is that Meta will sell compute to external labs in 2027, and the market is not accounting for this bump. All in all, the market is basically assuming that all the costs of the AI buildout continue for Meta, but that the firm will not generate any substantial revenue from this compute.”
The picture of the newly public SpaceX is still forming as it shifts focus to building its AI business. Morningstar analyst Nicolas Owens notes that second-quarter capex was “a whopping $18.37 billion.” That’s up from less than $3.0 billion a year ago, and it came as the company reported $7.8 billion in revenue for the second quarter. SpaceX executives said on the company’s call that they expect quarterly capex to be in the same range in the third and fourth quarters, and that full-year revenue will be on the order of $100 billion. Owens, however, expects 2026 revenue south of $40 billion, meaning capex would dwarf the cash the company brings in.
What’s Next for the Yen?
US investors rarely think about the currency markets, but they play a critical role in the global economy and financial system. That’s why it was notable when, just over a week ago, the US Treasury took the highly unusual step of joining the Bank of Japan in propping up the yen. Highlighting the interconnectedness of global markets, analysts say this was purely in the United States’ interests.
Here’s how Michael Diamantopoulos, an associate director for fixed income and currency at Morningstar, explains it:
The US Treasury’s involvement is rooted in market stability. If Japan were forced to continue defending its currency entirely on its own, it might need to liquidate substantial holdings of US Treasury securities from its official foreign reserves. Large-scale sales of US sovereign debt could push US yields higher and destabilize broader treasury and funding markets.
By participating—and executing part of the operation by selling euro reserves to buy yen—the US helps support the currency while avoiding direct pressure on US Treasury markets and avoiding hyper-fixation on a specific USD/JPY exchange rate level.
The yen is weakening for fundamental reasons. Even as the Bank of Japan has begun nudging interest rates higher after decades of keeping them low, policy rates in other major countries remain high and are expected to move higher.
“Although the Bank of Japan has initiated monetary policy normalization, its domestic policy rates remain modest compared to major global peers,” Diamantopoulos says. “More importantly, when adjusted for inflation—the real interest rate—Japanese yields remain noticeably lower than foreign real yields. This persistent real interest rate gap creates an ongoing incentive for international investors to allocate capital away from yen-denominated assets in favor of higher-yielding foreign currencies.”
The issue is that intervention is often just a temporary fix, analysts say. “In our view, the primary objective of this joint action is to stop or slow down the pace of yen depreciation, rather than engineer an outright reversal of the currency’s overall trajectory,” Diamantopoulos explains. “Lasting stability in the exchange rate will ultimately require further convergence in real interest rates and broader structural macroeconomic adjustments.”
Next Up: (Another) Critical CPI Report
Even before the July jobs report, the consensus was that Fed officials are much more focused on inflation signals than the jobs market. Friday’s muddled data only magnified that belief. “The Jul CPI report is a bigger event than today’s jobs numbers,” economists at Bank of America wrote.
Going into the report, expectations are for the CPI to show another slight softening in the inflation rate but reflect price pressures that are likely still too high for some Fed officials. The CPI is expected to show that inflation rose at a 3.4% annual rate in July, according to FactSet. That’s down a touch from 3.5% in June. Excluding food and energy costs, CPI is seen rising by 2.5%, also down slightly from June.
