😨 Big Tech's $770B problem

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Goldman Sachs just dropped a report with a plot twist: the AI boom printing record profits could be the same thing that drags those profits back down.

Wall Street loves a good villain origin story.

Right now, profits are doing the heavy lifting.

The S&P 500 is up 9% this year, even though stocks technically got cheaper on paper.

How? Earnings.

Forward earnings estimates jumped 17%, while the price-to-earnings ratio actually slipped from 22x to 21x.

In plain English? Companies aren't getting more expensive. They're just getting more profitable.

And profitability is everything.

Return on equity (basically, how good a company is at turning money into more money) hit a record 22%.

Goldman's rule of thumb: every 1-point move in ROE moves the market's P/E by roughly one turn.

So if profits wobble, valuations wobble too.

Enter the AI divide.

Not everyone in the AI gold rush is getting rich the same way.

The chipmakers are selling the shovels. Net profit margins near 50%. Pricing power for days.

The cloud giants are digging the mine. And digging is expensive.

Here's the scary number:

Goldman thinks the big cloud players will spend around $770 billion on capex in 2026.

That's roughly 100% of their operating cash flow. Every dollar coming in is going right back out the door.

Data centers don't build themselves, apparently.

So what happens to all that spending?

It hits the books. Depreciation for these hyperscalers is set to climb from 7% of revenue in 2022 to 12% by 2027.

Some are taking on debt and issuing shares to fund it all.

The result? Goldman expects return on equity for the biggest tech names to drop by an average of 7 points next year.

Apple takes the hardest hit, followed by Nvidia, Alphabet, and Meta.

But Goldman isn't calling a funeral.

The bank still sees the long game. Customer backlogs are growing. Margins at cloud providers are expanding. Revenue estimates are climbing.

AI models are also getting cheaper to run as cost-per-token falls and pricing holds steady.

And the bigger prize? Productivity.

More than half of S&P 500 companies talked up AI productivity on recent earnings calls. Few have put real numbers on it yet.

But if AI actually boosts earnings per employee across corporate America, that's a tailwind that lasts.

The real question:

Can record profitability stick around?

Because today's lofty valuations are leaning on it hard. If profits hold, the market's premium price tag makes sense. If they don't, well... you know how that goes.

1. Separate the Shovel-Sellers from the Diggers
Goldman says chipmakers are running ~50% margins while cloud giants burn cash on data centers. Not all "AI stocks" are the same trade.

📌 Action: Tilt toward semiconductor exposure via $SMH ( ▲ 1.73% ) or $SOXX ( ▲ 1.59% ) for the pricing-power story. Trim if your tech weighting is really just disguised capex risk.

2. Watch the Depreciation Cliff
Hyperscaler depreciation jumps from 7% to 12% of revenue by 2027. That quietly eats reported earnings even when revenue looks great.

📌 Action: Before next earnings, check free cash flow (not just net income) on names like $MSFT ( ▲ 0.1% ), $GOOGL ( ▲ 0.53% ), $AMZN ( ▼ 1.23% ), $META ( ▼ 0.26% ). Reward the ones still generating cash after the buildout.

3. Don't Pay 21x for Falling ROE
Every 1-point ROE drop tends to drag the market's P/E down ~1 turn. Big Tech ROE is forecast to fall ~7 points next year, Apple worst.

📌 Action: Rebalance away from the priciest mega-caps trading on past profitability. Rotate into broad exposure like $RSP ( ▲ 0.91% ) (equal-weight S&P) to reduce concentration in the names most exposed.

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Oil execs just gave the Trump administration a heads-up nobody wanted: pump prices could spike hard in the coming months.

The reason? Fuel inventories are running on fumes.

Some of the commercial and government stockpiles that kept prices from going nuts could be gone within weeks.

Bad timing too. Peak summer travel season is basically here.

Think of it like a phone at 4% battery, right as you're about to leave the house. Not ideal.

One energy analyst put it bluntly: the White House knows. And said there's "nearly universal alarm" among oil companies and analysts about where prices are headed.

And the backdrop isn't pretty.

Inflation just hit a three-year high, with the consumer price index climbing 4.2% in the year ending May. A big driver? You guessed it. Gas.

Where prices stand right now:

So why isn't the White House panicking?

Crude oil hasn't blasted past $100 a barrel yet, so some officials are treating the warnings as a bit of crying wolf.

But here's the catch. The execs aren't worried about today's price. They're worried about how fast the supply is draining.

When do the reserves actually run dry? Somewhere between the end of this month and the end of summer.

AKA nobody knows exactly when the tank hits empty, just that the needle's dropping fast.

Sunday brought a new Truth Social post from President Trump, and this one came with a plea.

Stop shooting.

His message was blunt: no more Israeli attacks in Lebanon, and no more Hezbollah attacks on Israel.

Then he added the kicker: "This could be the beginning of a long and beautiful peace. Let's not blow it."

Translation? Everybody calm down before this gets expensive.

Here's the thing about the Middle East. It's where a lot of the world's oil lives.

When the region gets shaky, oil gets pricey. When oil gets pricey, everything from your gas tank to your airfare feels it.

A wider war involving Israel, Iran, and Hezbollah could choke energy supplies and spike crude.

So markets watch this stuff like a hawk watches a field mouse.

Good news on diplomacy? Stocks tend to like it.

Fresh fighting? Investors sprint toward safe havens and commodities go for a rollercoaster ride.

Trump also said the US is very close to a deal with Iran to cool things down.

The catch? Iran isn't nodding along.

Tehran pushed back on the idea that a deal could be wrapped up in days. Their stance: talks are still talks, and nothing's signed.

Meanwhile, actual rockets were still flying.

Israel struck Beirut on Sunday, saying it was answering Hezbollah rocket fire into northern Israel. Lebanese media reported casualties.

Iran warned those strikes wouldn't go unanswered.

So we've got peace talks and live fire happening at the same time. Cute.

The US and Iran have been chatting through middlemen like Pakistan and Qatar.

Per Bloomberg, several draft versions of an agreement are floating around. They mostly agree on the headline stuff:

The agreement everyone wants. The fine print nobody agrees on.

The fight is over cash. Specifically, how much and how fast.

Some drafts hand Iran big access to frozen assets right away. Others say "earn it" by making progress in future talks.

One draft Bloomberg saw floated a reconstruction program worth at least $300 billion if a final deal lands.

Other reports say Iran wants tens of billions in frozen funds unlocked as part of the process.

That's not a rounding error. That's the whole argument.

If a deal restores Iranian crude exports or reopens Hormuz, the ripple effects are massive.

Think oil producers, refiners, airlines, and anything sensitive to inflation.

More oil flowing usually means cheaper oil. Cheaper oil cools inflation. Cooler inflation makes a lot of people very happy.

For now, both sides seem to agree on the easy part: stop fighting, keep talking.

The hard part, who gets paid what, is still wide open.