Capital markets have faced quite an array of moving pieces over the last couple of weeks, ranging from equity market rotation dynamics, volatile metals and commodity price action, geopolitical flare-ups, global central bank decisions, and high-profile earnings. Focusing on earnings, the five U.S. firms dubbed as data center and artificial intelligence (AI) hyperscalers — Google-parent Alphabet (GOOG/L), Microsoft (MSFT), Amazon (AMZN), Meta (META), and Oracle (ORCL) — recently reported broadly upbeat quarterly results. But it was their spending plans that lived up to the hyperscale moniker and drew the spotlight.
As a result of the hyperscalers’ continued jockeying for dominance in the intensifying AI race, combined capital expenditures (capex) from the five firms are expected to exceed a staggering $600 billion in 2026, predominantly earmarked for data centers and the necessary tools to operate them. META announced a 79% expected jump in spending to roughly $125 billion just a week before GOOG/L unveiled plans to spend around $180 billion. Nonetheless, it didn’t take long for these massive outlays to be bested by a $200 billion capex forecast from AMZN just 24 hours after Alphabet’s report. Plus, the median consensus forecasts from Bloomberg project MSFT to spend around $105 billion for the fiscal year ending in June. The estimated 60% combined increase from a year ago rattled investors with some sticker shock, exacerbating a skid in big tech shares sparked by ongoing rotation dynamics away from the index heavyweights. The bar to clear for sufficient AI returns to satisfy investors keeps getting higher.
But One Was Not Like the Others
Although META was an exception to the risk off response, and taking a look under the hood free cash flow was likely a primary factor in allowing the Facebook and Instagram parent to hold up a bit better than its peers. Without diving too deep into financial statement analysis, META’s trailing 12-month free cash flow balance was the only one of the five hyperscalers to gain ground from the prior quarter. While the social technology firm’s capex for last quarter and the year ahead both surprised to the upside, the rise in cash flow balances underpinned Wall Street’s confidence that it is on solid footing for the projected outlays. Outside of META, the remaining four firms all posted a decline in cash flow, kindling jitters that elevated 2026 spending guidance may shorten the timeline on when some (if any) begin to bleed cash — especially considering some (including GOOG/L and ORCL) have already begun to dip into credit markets to fill in funding gaps. Low leverage has been a key theme of the AI spending cycle, and while these behemoths have capacity to take on debt, potentially dwindling cash flows will place more scrutiny on the metric.
Key Takeaways
As seen this earnings season, the outlook for free cash flow will be key in gauging the health and stability of the AI investment cycle. And hyperscalers may be forced to walk a smaller capex tight rope as too little could signal less confidence in the AI outlook, while too much could impair shareholder value. Nonetheless, consensus forecasts still reflect positive, but volatile, cash flow growth ahead.
Some signs of eroding returns on invested capital (ROIC) have also caught investors’ attention. While this is noteworthy and should be monitored, it may not be doom-and-gloom. ROIC has also been volatile and historically has proven to front-run the fruits of the investment. For example, ROIC declined at the start of the AI buildout in 2023, but profits just hadn’t caught up yet.
We expect additional bouts of volatility for big tech and the broad market as the AI debate continues. But based on strong demand and adoption, the AI theme is on solid footing for now, in our view. For markets more broadly, the elevated spending will likely be a boon for earnings across the S&P 500 (as well as many multinational and international companies) as hyperscalers and beyond pay for the materials and industrial equipment associated with the data center buildout. Plus, expected productivity gains from AI development are also expected to be supportive for corporate America and the overall U.S. economy. Wall Street continues to forecast capex for the entire AI industry to reach $1 trillion by 2030, and as a bonus knock-on effect of the build out, some data centers, such as META’s facility in Odense, Denmark, heats 6,900 homes, providing cheaper heating and decarbonization.
Jeff Buchbinder, CFA, provides the top-down view of the stock market for LPL Financial Research. He has over 25 years of experience in equities.
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