Up to and including September 14, the communication services sector gained about 3.2 per cent while the wider S&P 500 suffered a loss of roughly 0.8 per cent. The 16 per cent increase in Meta’s share price and Alphabet’s rise indicate that investors are starting to distinguish between companies that can take advantage of artificial intelligence and those that bear the greatest costs of building it.
In the first half of September the strongest S&P 500 sector was not information technology but communication services, a sector which now includes some of the largest digital advertising, social media, streaming, search, and internet companies in the world.
The Communication Services Select Sector SPDR Fund, known as XLC, increased in value from $111.46 on August 31 to $115.07 on September 14, which is a gain of approximately 3.24%. During that time the SPDR S&P 500 ETF Trust dropped from $767.05 to $760.88, a decrease of about 0.80%.
The fact is significant since September has not been a straightforward month for growth shares. Information technology as a whole fell by about 1.2% during that time, and semiconductor stocks in particular suffered on September 14. The recent rise in the communication services sector shows that Wall Street is drawing a more detailed distinction within the AI sector. It seems that investors are becoming more ready to reward firms that already have huge audiences, advertising businesses and distribution networks, even as they remain doubtful about how much money should still be invested in the infrastructure supporting AI.
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Meta Platforms is the best example of this. On September 14 it made up 18.94% of the XLC, so it was the fund’s single largest position. The price of its stock was $572.34 on August 31 and rose to $665.60 by September 14, which is an increase of about 16.3% over just nine trading sessions. Meta also went up by 2.71% on September 14 alone.
The strength stemmed from a renewed excitement about Meta’s new personal AI agent, Muse. Muse was officially launched by Meta on September 8 as an agent able to carry out actions for users, not just respond to prompts. On September 9, Meta’s share price rose by 6.55%, and later reports showed that early interest in the product had greatly outstripped the company’s expectations. Muse also provides Meta with another means of generating AI revenue via more sophisticated paid features rather than depending solely on advertising.
The business in question is large enough for that possibility to be significant. Meta announced that its second-quarter revenue was $60.8 billion, a rise of 28% compared with the previous year. Ad impressions went up by 14% and the average price per advertisement rose by 12%. Average daily usage of Meta’s family of apps reached 3.60 billion. Mark Zuckerberg stated that AI was “accelerating our core business today” as well as bringing about new product and enterprise opportunities.
There’s an important exception: Meta’s costs and expenses rose by 55% to $42.0 billion during the quarter, its operating income dropped by 8%, the operating margin decreased from 43% to 31%, and capital expenditures, including payments on finance leases, amounted to $31.08 billion. Meta expects its capital expenditures to be in the range of $130 billion to $145 billion in 2026. The reason for the stock’s rally in September is therefore not merely a wager on AI; it is becoming more and more a bet that Meta will be able to generate sufficient revenue and efficiency so as to justify the huge investment.
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Alphabet is the second company whose impact on the sector’s performance cannot be overlooked. On September 14, Alphabet’s Class A and Class C shares together made up about 18.5% of the XLC. When you add Meta into the mix, the three securities together accounted for around 37.5% of the whole fund.
On August 31, Alphabet Class A shares closed at $339.35 and by September 14 had reached $349.39, representing an increase of just under 3%. While that rise is much smaller than that of Meta, Alphabet’s most recent operating figures offer a solid fundamental reason for why the market is still providing the company with a large amount of AI exposure.
Alphabet announced that its second-quarter revenue reached $119.8 billion, a 24% increase compared to the previous year. Google Services revenue rose by 15% to $94.5 billion, Google Search and other revenue increased by 17%, and advertising revenue from YouTube went up by 13%. The most notable figure was Google Cloud, with its revenue jumping 82% to $24.8 billion. Cloud operating income amounted to $8.8 billion, up from $2.8 billion the year before. The company’s consolidated operating income rose by 30%, and its operating margin climbed to 34%.
The figures show an important fact regarding the present market situation. Alphabet is not merely purchasing chips and building data centres; it already operates businesses that can provide AI infrastructure, AI services, advertising and cloud computing to hundreds of millions of customers and companies. Yet these opportunities come at a high cost since Alphabet raised $49.6 billion by issuing equity and preferred stock in the second quarter, some of the funds being used to expand its AI infrastructure and global computing capacity.
The odd thing happened on September 14 when semiconductor shares dropped because people were calling for AI development to be slowed down and this caused worries regarding future demand for chips; yet Meta increased by 2.7 per cent and Alphabet Class A went up by 3.2 per cent. It seemed that investors had worked out slower AI development might cut down some of the enormous amount of infrastructure spending needed by the big technology companies. To put it plainly, negative news for firms that sell the tools of AI could possibly reduce their largest customers’ future expenses.
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There is, on the other hand, a strong counter-argument against stating that there is a general boom in the communication services sector. Since XLC includes only 24 holdings and Meta and Alphabet together make up over one-third of the fund, a 16% change in Meta can have an unusually big impact on the performance of the sector. The first half of September might be giving investors more information about those two huge digital platforms than about all the individual media, telecommunications or entertainment companies.
It also involves a certain level of risk. While Meta’s revenue is increasing quickly, the most recent quarter revealed a falling operating income and a marked rise in expenses. Although Alphabet’s main operations are expanding rapidly, the company is at the same time raising capital and allocating huge amounts of money to AI infrastructure. Neither company has avoided the key issue facing the AI boom, that is, whether the cash flows in the future will eventually yield adequate returns on the huge investments made today.
The early winner in the September sector therefore sends out a more interesting message than merely indicating that technology shares are rising again. The market seems to be shifting from rewarding AI investment per se to rewarding evidence that AI can in fact be monetized. Meta has advertising, billions of users and is now also involved with Muse. Alphabet has Search, YouTube, Cloud and Gemini. The existing businesses of each company provide it with a number of ways of turning its AI capabilities into revenue.
The situation in the second half of September will show whether this represents a true sector rotation or merely a rally by Meta and Alphabet that is concealed within a sector ETF. If the gains start to spread more widely among the communication-services companies, then the leadership will appear more solid. But if the gains still remain confined to two companies, XLC’s lead could vanish quickly.
Yet at the moment the first part of September has yielded an unusual outcome: the sector performing best in the market is not the one that manufactures the AI chips, but rather the one which includes some of the companies attempting to demonstrate that all of those chips will eventually be able to make a profit.