AI Trade Demands Proof of Profitability
BlackRock Investment Institute’s Ben Powell, chief investment strategist for the Middle East and APAC, has indicated that the recent US earnings season has significantly raised the bar for the artificial intelligence (AI) trade. In an interview with Moneycontrol, Powell highlighted that with AI spending currently running ahead of revenues, investors are increasingly demanding clear evidence that these heavy investments will translate into sustainable earnings and cash generation.
"This is an environment for selectivity rather than simply buying every dip," Powell stated. His comments follow a sharp correction in US technology stocks on October 30, when the Nasdaq 100 fell 3.5% and the Nasdaq Composite dropped 2.86%, marking its worst day since June. During this selloff, the S&P 500 lost 1.82%, Nvidia declined 4.2%, and the Philadelphia Semiconductor Index slid 7.2%.
The market debate has shifted from whether AI is a viable theme to whether the massive infrastructure costs can be recovered through future profits. Powell noted that while BlackRock remains constructive on AI as a structural theme, the current environment requires companies to demonstrate credible paths to monetization. Companies that can fund AI investment from their own cash flows and protect margins are likely to be rewarded, whereas those dependent on aggressive borrowing or unproven models face greater scrutiny.
India: Structural Overweight, Tactically Neutral
Amidst the volatility in US tech stocks, Powell positioned India as a distinct counterpoint to the concentrated US AI trade. BlackRock maintains an above-benchmark allocation to Indian equities over a five-year-and-beyond horizon. This strategic stance is supported by India’s expanding workforce, rising productivity, digitalization, and the deepening of domestic capital markets through growing household investment in financial assets.
However, Powell drew a clear line between the long-term structural view and near-term positioning. "We remain more neutral tactically and would like to see stronger earnings," he said. This suggests that while the long-term growth story is intact, the firm is waiting for improved corporate performance before adjusting its short-term exposure.
From Creation to Adoption
Powell also outlined a longer-term shift in how AI creates value, suggesting that the next phase of the opportunity may extend beyond chipmakers, model developers, and hyperscalers. He emphasized that businesses successfully adopting AI to improve productivity, logistics, diagnostics, and customer service could also benefit significantly.
For India, this implies a potential opportunity that differs from the US hyperscaler model. Instead of focusing solely on building AI infrastructure, India could leverage its large, digitizing economy, young workforce, and expanding formalization to put AI to work across various sectors. This approach aligns with the country’s broader digital adoption trends and growing savings culture.
The Scale of US Capital Expenditures
The pressure on US tech giants is evident in their capital expenditure figures. Amazon, Alphabet, Microsoft, and Meta are collectively expected to spend as much as $828 billion on capital expenditure this year, a significant portion of which is directed toward AI-related infrastructure. Alphabet’s future spending commitments have crossed $1 trillion, while Meta’s have risen to $825 billion.
Recent financial results reflect this strain. Alphabet posted negative free cash flow for a second consecutive quarter, and Amazon’s capital spending came in higher than expected. These figures underscore the intense scrutiny investors are applying to the sustainability of AI-driven growth in the US market.