The tide of AI panic recedes, and tech giants rebound with "force": is it a return of the kings or just a fleeting moment?

Microsoft Corporation (MSFT.US) saw its stock price drop by as much as 19% this year but has now turned positive; Amazon.com, Inc. (AMZN.US) has seen an 18% increase so far this year. Is the massive capital investment in the AI sector simply burning money, or is it sowing long-term value? The market has given a partial answer over the past two weeks. Within just two weeks, market sentiment dramatically reversed from AI bubble burst to tech stock resurgence. Microsoft Corporation announced its quarterly earnings after U.S. stock market hours on July 29, leading to a 16% spike in its stock price the following day. Amazon.com, Inc. released its financial results on July 30, resulting in a 15% increase in its stock price on the next trading day. Over the six trading days since July 29, Microsoft Corporation's stock price has risen by a cumulative 28%, while Amazon.com, Inc.'s has increased by 20%, adding a combined market capitalization of $1.3 trillion for the two companies. Before the earnings reports, Microsoft Corporation had experienced a cumulative decline of 19% in its stock price this year, making it the largest single contributor to the poor performance of the S&P 500 index; after the earnings release, Microsoft Corporations annual growth turned positive to 3.4%. The S&P 500 index hit a new high recently, with Microsoft Corporation as a core driving force. Amazon.com, Inc. has underperformed the market for most of this year but now has an 18% increase, becoming the fifth-largest component stock that pulls the index upward. The current market situation is incredibly wild, commented Arup Dutta, a portfolio manager at Mackenzie, Investor sentiment is extremely volatile, and the speed of market shifts is rapid, sometimes even leading to overreactions. The Nasdaq 100 climbed for four consecutive days, marking one of the most extreme volatility events in history. Cloud Business Support: Huge AI Spending Finally Has Justifiable Reasons The core catalyst for this sentiment reversal was the latest earnings reports from Microsoft Corporation and Amazon.com, Inc. In the fourth quarter, Microsoft Corporation's Azure cloud revenue grew by 43% year-on-year, marking the highest growth rate since early 2022; Amazon.com, Inc.'s AWS cloud business saw a year-on-year revenue surge of 37% in the second quarter, achieving accelerated growth for the fifth consecutive quarter. The impressive cloud growth has prompted investors to reevaluate the tech giants' significant AI capital expenditures. Tom Plumb, president and portfolio manager at Plumb Funds, stated, The market is gradually reaching a consensus that investments from leading tech companies are logically sound. For the first time in years, Microsoft Corporation and Alphabet Inc. Class C are facing negative cash flow due to heavy AI capital investments, but current cloud business return expectations are sufficient to cover short-term investment costs. He has a long-term holding in Microsoft Corporation, Amazon.com, Inc., and Alphabet Inc. Class C parent company Alphabet (GOOGL.US). The markets contradictory attitude towards capital spending is best reflected in Alphabet. The companys earnings report released two weeks ago showed excellent cloud business performance, but was overshadowed by high capital expenditures and a contraction in free cash flow, leading to a 7.1% drop in its stock price the day after the earnings release, which later rebounded to the highest point since June. This week, fears of talent loss impacting research and development arose after several senior AI employees left, further dragging down Alphabet's stock price. However, the stock remains up over 14% year-to-date. Triple Resonance Sparks Rebound: Valuation Repair, Leverage Clearance, Macroeconomic Recovery This round of tech stock rebound is not driven by a single favorable factor but is the result of multiple overlapping influences. First, prior significant declines in valuations have made the price-to-earnings ratios attractive. Before the earnings releases, both Microsoft Corporation and Amazon.com, Inc. had expected price-to-earnings ratios of less than 20 times for the next 12 months, roughly in line with the S&P 500 index valuation levels. Over the past five years, Microsoft Corporations average price-to-earnings ratio was 28 times, while Amazon.com, Inc.'s was 34 times. Even after the rebound, the Nasdaq 100 index has a price-to-earnings ratio of only 22 times. For a high-growth industry, this is a relatively cheap valuation, said Ed Yardeni, president and chief investment strategist at Yardeni Research, believing that tech stocks still have more upside potential. Another positive factor is that Goldman Sachs Group, Inc.'s brokerage data shows that investors still have relatively low overall holdings in the seven major tech giants (including Microsoft Corporation, Amazon.com, Inc., Alphabet, Apple Inc., Meta Platforms, NVIDIA Corporation, and Tesla, Inc.), indicating that there is still significant room for buying. Second, the completion of forced liquidations from highly leveraged funds has cleared negative sentiment. Previously, the high-leverage Situational Awareness fund under Leopold Aschenbrenner had to forcibly sell off AI-related positions, exacerbating market selling pressure. The Nasdaq 100 index dropped 11% from its June peak to July 29, creating deep adjustments that opened up space for the subsequent rebound. Large tech stocks rebounded strongly, driving the Nasdaq 100 index up for four consecutive days. Michael O'Rourke, chief market strategist at Jonestrading, commented, The Situational Awareness fund event was clearly just a short-term liquidation event. Another catalyst was the earnings reports from Microsoft Corporation and Amazon.com, Inc.the key was that their cloud revenue growth met expectations. Third, macroeconomic risks have temporarily eased. Previously, optimistic sentiment regarding the reopening of the Strait of Hormuz had temporarily driven oil prices down. However, Iran announced on Thursday that it had reached a preliminary agreement with Oman to reopen the strait, although U.S. and Israeli vessels would not be permitted to pass, leading to an immediate rebound in oil prices, which once again pressured the S&P 500 index, although overall market risk appetite has clearly improved. Amid the euphoria, hidden concerns remain. However, not everyone feels secure about this rebound. O'Rourke stated bluntly, This is not healthy market behavior; it seems more like a bear market rebound. All the gains happened within a few days. From the trading activity, I havent seen a large influx of institutions rushing to buy these mega-cap stocks. Its more driven by quantitative funds, passive indexes, and speculative options. Retail investors also show a clear herd effect. He also emphasized that the core negative factors that previously suppressed tech stocksmassive capital expenditures and pressure on free cash floware still very much present and have not truly disappeared. The difference is that cloud revenue has partially validated the reasonableness of these expenditures. In the short term, the growth of cloud businesses among tech giants provides solid data support for AI investments. However, whether the market can transition from soaring within a few days to steady upward movement will still require more quarters of performance verification. This journey of tech giants towards self-verification has only just begun.