US stock markets staged an impressive recovery on Wednesday, after initially falling sharply on the back of a weaker than expected Q1 GDP report. The S&P 500 managed to eke out a gain, and the Nasdaq closed down a touch. We mentioned in our GDP review that the details of the report were brighter than the headline figure suggested, however, news that the EU and US trade negotiations would start next week also helped to boost sentiment. Futures markets have extended gains in afterhours trading, suggesting that the recovery rally, which has boosted the S&P 500 by 8% in a week, could be extended into Thursday.
For now, fears about the end of American exceptionalism look a little extreme. Alongside the recovery in US stocks, Treasuries are outperforming their global peers on sovereign debt markets, and even the dollar is attempting to put in a low after a bruising start to 2025.
Tech earnings were also in focus this evening. Both Microsoft and Meta beat earnings expectations, which could lead some to argue that concerns about China’s threat to US AI dominance was overdone. Below, we take a closer look at Meta and Microsoft’s earnings.
Microsoft: AI investment starts to pay off
As we led up to these results, concerns about Microsoft’s commitment to AI was in focus. Earlier this year, Microsoft canned some data centres, which left some analysts worried that the company would scale back its move into AI because it was not profitable. However, the actual results for last quarter, may assuage fears about Microsoft’s commitment to AI.
The company posted revenue of $70.1bn for last quarter, and an 18% jump in profits. Net income was $25.8bn, while earnings per share was $3.46, easily beating estimates of $3.21. So, have investors been too downbeat on tech and AI? Microsoft’s results would suggest yes. The company’s Azure and other cloud revenue, which is the centre for AI, rose by 35%, beating forecasts for a 31% increase. The company reported strong revenue growth in most segments, and AI was the chief driver. For example, Microsoft 365 Commercial products and cloud revenue grew by 11%, Microsoft 365 consumer division also saw products and cloud revenue jump by 10%. Its Dynamics products and cloud revenue rose by 11%. Intelligent cloud saw revenue rise by 21%, driven by Azure and other cloud products.
Microsoft is continuing to spend on capex. It will spend $16.75bn, higher than estimates of $16.28bn. In the past, capex spending growth spooked investors, however, now that the company is generating profit from its AI business, the market may cheer higher levels of capex spend to boost further growth. Microsoft’s share price has surged nearly 6% in after hours trading, and this is lifting other big tech stocks. Amazon’s share price is higher by nearly 3% on Wednesday night, ahead of its earnings report tomorrow. Nvidia’s share price is also higher by 3.3%, as Microsoft’s results bodes well for Nvidia chip demand. Microsoft is Nvidia’s single biggest customer, and sales of chips to Microsoft account for 18% of Nvidia’s annual revenue.
Overall, Microsoft’s results can lift the tech sector as we move into the end of the week, which could help the tech sector to play catch up with other US stock market sectors, as it looks like Big Tech is back.
Meta gains on ad revenue, as it bets the house on AI
The good news did not stop there. Meta also reported revenue of $42.3bn, and net income of $16.64bn, earnings per share smashed estimates at $6.40, vs, estimates of $5.33. This is a sign that Meta can boost its profitability during unstable times and can weather storms from stock market volatility. The company also posted forward guidance and said that it expects Q2 revenue to be between $42.5bn and $45.5bn, the estimate was $44.06bn, so Meta’s revenue range has topped estimates.
Meta also significantly raised its capex spend to $72bn this year, up from $65bn three months ago. This is another sign of confidence in the profitability of AI, as Meta has said that it wants to be an ‘AI leader’. The company is also looking at business messaging as the next big growth area.
The company generated 98% of its revenue from advertising sales, which suggests that the company is still reliant on its ad revenue cash cow to pay for the capex spend necessary to make it an AI leader. Since Meta’s ad revenue has proven to be resilient to tariff unrest, the outlook for Meta’s investment ambitions looks good.
Meta’s stock price is higher by 5% in after hours trading, suggesting that it could be a big day for Wall Street on Thursday. If Meta can extend gains to 6% on Thursday, then it could move into positive territory for the year.
US GDP and earnings provide a platform for stock market recovery
Overall, although the US economy slowed sharply in Q1, some of this was down to trade data that could be reversed. Added to this spending and investment were both strong, suggesting that the fundamentals of the US economy have not been permanently damaged by the tariff turmoil. The earnings reports from Meta and Microsoft have also boosted hopes that big tech can weather the tariff storm. Apple will be another test, however, because it has a larger consumer element and is highly leveraged to China, even if it does report weakness in its earnings, it may not weigh on the entire sector.
Overall, these results give tech a strong platform to recover, and potentially erase losses recorded earlier in 2025.