Earnings Season Kicks Off: AI Spending and the Consumer Go on Trial

Author: Ruben Dalfovo, Investment Strategist

Key Takeaways

• Earnings season will test the strength of AI demand against high expectations.
• Consumer companies will reveal household spending trends, including trading down or pushback.
• Guidance and margins may be more critical than headline profits for investors.

Introduction

The upcoming earnings season presents two significant questions for investors: Are companies still investing heavily in artificial intelligence (AI) infrastructure? And are consumers maintaining their spending levels to support profits outside the tech sector?

The AI Bill Needs Approval

AI requires substantial resources, including chips, memory, servers, and data centers, all of which depend on financial backing. Investors will closely monitor semiconductor and cloud companies to assess whether demand remains robust and if customers plan to continue aggressive spending.

For instance, Samsung's recent profit guidance indicated ongoing AI demand for memory chips, but market reactions were cautious, reflecting concerns about the sustainability of this momentum.

The critical question for investors is whether AI is generating lasting earnings power or merely a profitable cycle. Earnings calls will provide early insights into this debate.

The Consumer Gets Called to the Stand

Companies like PepsiCo and Delta Air Lines will report their second-quarter results, offering insights into consumer behavior. PepsiCo's results will indicate whether consumers are accepting higher prices or if they are becoming more cautious, while Delta will provide a gauge on travel demand and consumer spending on experiences.

Investors should focus on volume growth rather than just revenue increases, as price hikes can only go so far before consumers react by switching brands or reducing purchases.

Consumer sentiment data shows a slight improvement, but confidence remains low, suggesting that while households are not breaking, they are not spending enthusiastically either.

The Real Test: Breadth of Market Strength

A healthy market rally typically requires earnings strength to be widespread. If AI-linked companies continue to drive growth while consumer-facing sectors weaken, the market may become overly reliant on a single theme, increasing sensitivity to potential disappointments.

This earnings season will test three main areas: the sustainability of AI infrastructure demand, consumer spending volume, and the maintenance of profit margins amidst rising costs.

Risks Investors Should Watch

• High AI expectations may lead to disappointment, even with strong results.
• Consumer fatigue could manifest in weaker sales volumes and increased price sensitivity.
• Guidance from companies will be crucial; cautious outlooks can lead to market corrections.

Investor Playbook

• Prioritize guidance over last quarter's profits.
• Look for volume growth in consumer companies, not just price increases.
• Compare profit growth with share price performance for a clearer picture.
• Assess whether earnings strength is broad-based or concentrated in AI sectors.

Conclusion

Earnings season serves as a pressure test rather than a definitive forecast. It will provide insights into the sustainability of AI spending and consumer behavior. A strong performance from both sectors could solidify market gains, while reliance on a single theme could lead to vulnerabilities.