As we countdown to earnings season, Big Tech's historic market run faces a major reality check.
Microsoft, Amazon, Alphabet and Meta slated to spend a staggering $635 billion on AI infra in 2026.
But with the ongoing Iran war driving up energy costs, those massive data center investments could face steep revisions.
One major roadblock is a severe shortage of critical electrical equipment, including transformers, switchgear, as well as batteries.
Meanwhile, the AI boom is sparking a brutal supply shortage in conventional memory chips, sending prices skyrocketing for enterprise IT budgets.
And earlier, the Bank of Japan stating surging oil prices are hitting company profits and consumer spending, warning that the Iran war could hurt the U.S. economy. as well as Japanese economy.
Well, joining me this morning from Tokyo, Japan, is Melissa Otto, Head of Visible Alpha Research at S&P Global Market Intelligence.
Well, good evening to you, Melissa.
Thank you so much for joining us.
So before the Middle East conflict escalated, we were looking at a staggering $635 billion estimated in tech capex for 2026.
So how likely are we to see big tech pull back on AI spending?
Hello, Remy.
Good morning.
It's great to be here.
Thanks for having me on this morning.
You know, it's going to be really interesting to hear from companies this earnings season.
Whether or not they're going to maintain the guidance that they set out.
Last quarter and you know, I think the trajectory and momentum of that CapEx is really going to be a. clear signal to the market about what the direction of AI spend is going to look like.
Yeah, and Melissa, we're also keeping a close eye on chip makers, including Samsung as well as Micron, just because they're diverting capacity to high bandwidth memory for AI data centers.
So give us your take on how your expectations stand right now in terms of supply and how you expect this to hit traditional corporate IT budgets.
Yeah, I mean, just simply looking at the trajectory of memory Memory is just continuing to see upward revisions.
The market is really baking in a lot of expectation for this year and next year.
Next year overall, for example, Micron is expected to generate $100 in EPS and the stock is trading at $366.
So we're talking about a market consensus PE ratio of around 3.5 times.
So, you know, I think in terms of like the pricing and the demand, it's just continuing to be very strong and that is getting reflected in estimates.
Yeah, and Melissa, when it comes to margins for AI chips, we know they are much higher, but with new US fabs still years away, and also given the constraints that we're seeing in supply chains, would you say that non-AI enterprise buyers are simply stuck footing the bill for this tech transition?
I think everybody's footing the bill a bit for it.
Based on what the market is signaling, it just seems that as we look out to the second half, higher memory and ship prices in general are likely to start to impact the overall cost structure of what it means to build out some of the AI infrastructure.
Yeah.
And Melissa, you are joining us from Tokyo this morning.
So I do want to pivot to the macro picture over in Japan.
So tell us how tighter monetary policy in Japan could impact overall global liquidity.
And tell us what you're seeing on the ground.
Yeah, I mean, it'll be pretty interesting.
I've never really observed Japan so inexpensive from a U.S. dollar perspective.
So, I mean, we've seen it flirt with similar levels of yen-dollar, but I think the overall The cost of things is just significantly low relative to what you would pay in the U.S. or Europe for similar expenses.
Things like getting to and from the airport, you know, just simply going, you know, following the McDonald's index, you know, very basic things like a coffee at Starbucks, significantly lower price in U.S. dollar terms.
Yeah, and Melissa, we know that across the globe we are paying attention to the cost of everything in addition to surging energy prices and what that actually means for inflation and how central banks move.
But when it comes to Japan, the nation is pouring billions into revitalizing its domestic semi-industry.
So how critical is this industrial resurgence, would you say, in terms of clearing up some of the extreme supply bottlenecks that we're actually seeing?
I mean, it's a double-edged sword because on one hand, we need the supply, right?
The overall industry needs the supply.
However, at the same time, the concern is that we're gonna enter a period of overcapacity again.
And we've seen this happen before.
This has happened in the past where you see these boom and bust cycles.
Now, one of the things that we're hearing is that it's different this time.
We're not gonna have the same boom and bust that we've had previously.
There was commentary from the CEO post-quarter about this.
And I think the market really wants to see clear evidence of this.
And I think understand how some of their long term contracts are going to impact the stability of their earnings, particularly at Micron.
Yeah, and finally, I do want to get your take as we head into earnings season, what your expectations are for the names that you cover.
Yeah, expectations are a little bit up in the air at the moment, you know I think generally when I look at estimates and the trajectory of consensus it's positive.
But the commentary around those estimates is very much focused on what this next quarter is gonna deliver and how management teams are gonna guide the market.
The guidance is going to be one of the most important probably of the year, given the current conflicts that we're having in the geopolitical situation.
So how markets absorb some of these issues and how companies are able to maintain growth and resilience at the same time will be critical.
Well, Melissa, we will have to leave it there for today.
But thank you so much for joining us all the way from Japan today.
And thank you so much for sharing your insights and your perspective.
