The news: While the slow-moving economy affected earnings for Microsoft and Google parent Alphabet, both companies delivered solid if unspectacular quarterly results—and shifted focus to AI, which both believe will revolutionize search.

• Microsoft’s revenues for its fiscal third quarter rose 7% to $52.86 billion, fueled by its cloud segment. LinkedIn revenues grew 8%.
• Google's “Search and Other” revenues are holding steady (just 1.87% growth)—although YouTube ad sales actually dropped. By comparison, Microsoft’s search and news advertising revenues (excluding traffic acquisition costs) jumped 10%.
• Alphabet also announced $70 billion in additional stock buybacks, signaling the company's confidence in its financial health.

Expectations vs. reality: Both companies did “well” with respect to analyst expectations. Just a year ago, these tech giants might have been mortified by aspects of these results, but we’ve started to expect less growth over the last few quarters—and earnings season is largely an expectations game.

• Case in point: Google’s 1.87% search revenues bump was dramatically lower than its 24.28% growth a year earlier and the 30.11% jump in Q1 2021.
• Corporate technology budgets are being slashed due to market uncertainty, and companies are scrutinizing what they spend on cloud services and software licenses—both of which are major contributors to both companies' bottom lines, but especially critical to Microsoft.
• Google is especially vulnerable to advertisers reducing their ad buys—and though consumer spending hasn’t cratered, many advertisers remain cautious.

The AI battle: Microsoft in particular has benefited from the ongoing enthusiasm over generative AI, gaining a perceived initial advantage in its AI war with Google when it announced the integration of ChatGPT into Bing earlier this year.

• The company initiated the tech sector’s current AI boom by investing billions of dollars over several years in ChatGPT creator OpenAI, integrating variations of the technology into its products.

Our take: When it comes to generative AI, Microsoft may be winning the hearts and minds of investors and consumers right now. But it’s not really a short-term battle; it’s a long-term AI war. Although Microsoft has drawn first blood optically, these are very, very early days.

• Google is the search leader—and anything that Microsoft can do, especially through Bing, has the capability to eat into Google’s future revenues, which are heavily weighted toward search.
• Our latest forecast pegs Google's worldwide search ad revenues at near $160 billion in 2025—shouldMicrosoft continue to demonstrate it is faster to innovate in search, it’ll be a rocky road for Google.