What Q4 US earnings did and didn’t tell us about AI and the outlook for tech shares
Tech saw solid earnings, but there are more questions around which companies will benefit from AI, and which will be hurt.
Key takeaways
- Morningstar analysts say that positive fourth-quarter earnings show there’s plenty of room for the AI trade to run, even as tech stocks lag.
- Strong demand for AI products and infrastructure helped tech revenue surge, but questions remain around how long that can last.
- Software companies continue to see a mismatch in earnings growth and share price losses, with analysts tracking whether hefty AI-related investment will yield long-term returns.
To judge from technology stocks’ fourth-quarter earnings, the sector is cruising strongly, with the artificial intelligence boom continuing to fuel growth. But the same reports, along with guidance from a number of key companies, have left investors with more questions than answers about the long-term profitability of massive investments in AI.
The tech sector had a rocky start to the year, losing 5.56%, following gains of 21.43% in 2025. Anthropic’s release of a new AI tool in February sent software stocks into a sharp downward spiral over concerns about potential disruption in the industry. Investors also remain nervous about whether companies can translate their sizeable AI investments into profits. But Morningstar analysts think these fears are overblown, considering positive fourth-quarter earnings reports. “The disconnect between near-term fundamentals and long-term fear is enormous,” says Dan Romanoff.
While share prices for software names like Microsoft MSFT and Salesforce CRM have continued suffering double-digit losses this year, both companies posted upward earnings growth, bolstered by strong AI service performances. Nvidia NVDA reported fourth-quarter revenue up 73% year over year, ahead of guidance. However, share prices haven’t correlated with this upward trajectory; the stock is down 1.9% so far this year.
Semiconductor manufacturers Monolithic Power Systems MPWR and Broadcom AVGO also ended 2025 with stronger-than-expected revenue. The picture is mixed for these companies. While Monolithic Power has soared 21.3% this year so far, Broadcom—which recently posted strong sales driven by AI products—has lost 8.3%.
As shares continue falling, Romanoff thinks the positive earnings picture is reason for investors to stay the course in the broadly undervalued sector. “Trends are largely stable, so while [it may look like the sky is falling], there is no actual evidence that’s happening,” he says.
Strong earnings reports drive optimism and shares - for some
While Nvidia and Broadcom have posted strong earnings alongside share losses, companies in the chip and semiconductor equipment spaces have seen a much closer alignment between their results and their market performance. Applied Materials AMAT posted strong January-quarter results amid growing AI spending. Shares have jumped 36.9% so far this year. In their latest earnings reports, Lam Research LRCX and KLA KLAC both projected double-digit growth for 2026, buoyed by increasing demand and a limited supply of AI products. Lam stock has climbed 26.9% on the year, while KLA is up 18.8%.
The construction of data centers will also fuel demand for AI infrastructure products, including network tools and cloud computing products. Morningstar analyst Brian Colello says this will help earnings momentum accelerate: “We know that AI infrastructure buildouts are still booming.”
Like AI manufacturing companies, memory and storage firms like Sandisk SNDK and Micron Technology MU have seen jumps in earnings and share price growth. In their most recent reports, both firms doubled their consensus growth estimates. Sandisk’s fair value estimate was raised to $670 per share from $135, nearly a 400% increase. Micron’s share price has gained 33.0% this year.
Questions remain around long-term returns
Analysts say the increasing demand and constrained supply of AI products is difficult to predict in the long term. In a recent Sandisk earnings note, Morningstar’s William Kerwin wrote that excess supply or a correction in demand could have serious ramifications for profits and stocks: “The biggest question mark is how long this investment lasts. From my point of view, supply constraints are keeping things humming for the next two years at least.”
Kerwin thinks the key is for tech companies to commoditize their AI investments while robust demand remains a tailwind. “We’ll need to see increasing monetization of AI to justify investments continuing to rise from these already-heady levels,” he says.
During 2026, analysts will be looking for whether AI investments can become a significant growth driver. Last month, Monolithic Power posted better-than-expected fourth-quarter revenue, largely thanks to non-AI growth. In a recent earnings note, Kerwin said he anticipates the company’s AI-related revenue will take the lead this year. In its latest earnings call, Broadcom projected $100 billion in annual chip revenue next year, which Kerwin sees as evidence the AI trade still has room to run. “We expect AI growth to become more durable. Even if there’s a correction at some point in the future, we’d expect growth to follow in the long term,” he says.
Uncertainty around scale of AI spending, especially for software
For software companies, positive earnings reports haven’t quelled market skepticism over whether massive AI investments will pay off in the long term. As a result, shares continue to tumble. Since the start of the year, ServiceNow NOW and Salesforce have each lost 26%. During that same time, Oracle ORCL is down 23.4%, Adobe ADBE is down 22.6%, and Microsoft has lost 16.3%.
But investors may be overreacting to disruption fears. Analysts point to the latest batch of earnings as signaling a healthier software industry than share prices reflect. “Even as the bottom has fallen out for their shares, software companies continue to generally report solid results,” Romanoff says.
ServiceNow beat revenue expectations in its fourth quarter, while Salesforce reported revenue in line with expectations, with annual recurring revenue for its AI-driven platforms up 114%. Adobe posted its sixth consecutive quarter of stronger-than-expected revenue. Microsoft’s latest earnings also outperformed guidance, with demand for its Azure AI services surging. “AI adoption within major software platforms is starting to happen. Growth is substantial off of a very small base,” Romanoff says.
Still, investors aren’t completely sold on software companies hedging billions of dollars on AI investment. In its most recent earnings release, Microsoft announced $37.5 billion in capital expenditure, up from $22.6 billion in the same quarter last year. “[Capital expenditure] is growing significantly faster than Azure, which continues to surface the concern that Microsoft may struggle to earn returns on its rapid data center expansion,” Romanoff wrote in a recent note.
Colello points out that in their latest earnings reports, other major tech names have also announced larger-than-expected AI spending forecasts, but with continued uncertainty around long-term returns. “The unanswered questions are still the same,” he says. “What is the pace of AI expansion beyond 2026? Token usage is exploding, but what is the return on investment?”
As the market continues to rotate away from tech stocks despite broadly positive earnings, Morningstar analysts see opportunity in the pullback, which is making the sector appear broadly undervalued. Today, 26% of undervalued stocks fall within tech, with more than two-thirds of those in software.
