AI Earnings Tailwind Fades as Depreciation Headwind Intensifies

The massive investment in AI infrastructure has been touted as a key driver of earnings growth for mega-cap tech companies. However, a closer look at their financial statements reveals that most of these investments have yet to show up as expenses on income statements.

According to Goldman Sachs' Ben Snider, the hyperscalers - including Amazon, Meta, Alphabet, Microsoft, and Oracle - are expected to spend $800 billion on capital expenditures (capex) this year, a 94% increase from last year. While this spending is flowing through to the earnings of companies providing AI infrastructure, it's a different story for the hyperscalers themselves.

The bulk of these investments will be depreciated over several years, with the majority showing up as ballooning depreciation expenses in future quarterly earnings reports. This means that investors should expect a significant headwind from depreciation expenses to offset the boost from AI investment spending to S&P 500 earnings growth.

Goldman Sachs estimates that hyperscaler depreciation expenses will continue to increase, causing a drag on S&P 500 earnings growth of 5 percentage points in 2027 and nearly half of the 11% boost from capex spending. By 2028, the drag from depreciation should offset the uplift from continued capex spending.