Concerned about an AI bubble? Sign up for The Daily Upside for smart and actionable market news, built for investors.
19th-century Parisian Opera crowds were so notoriously hard to please that companies hired paid sycophants, known as claqueurs, to clap, hoot and holler. AI hyperscalers might want to revive the tradition.
Last week, Alphabet reported the biggest quarterly profit in its history, with the $112.1 billion take almost quadrupling what it made a year earlier. The company’s shares fell more than 7%: Investors, racked by anxiety over the company’s massive capital expenditure plans, paid more mind to the Google parent hiking its 2026 spending forecast by $15 billion. Tough crowd. This week, Microsoft, Meta and Amazon get their turns.
Sign up for The Daily Upside at no cost for premium analysis on all your favorite stocks.
READ ALSO: YouTube’s Peacock Partnership is a Streaming Bundle Breakthrough and China’s Making Memory with its New Biggest Company
Coping With Capex
To find out why higher AI capex has deepened investor worries about hyperscalers’ returns on investment, look no further than the $700 billion in combined capex Alphabet, Microsoft, Meta and Amazon are on track for this year. Wall Street forecasts that figure could top $1 trillion in 2027.
In a research note last week, Moody’s analysts warned capex plans could “threaten credit quality” at Alphabet, Microsoft, Amazon, Meta, Oracle and CoreWeave as they make the costly transition from asset-light models built around software, IP and cloud services to asset-heavy models requiring “unprecedented levels of investment and capital raising.”
“These companies are very large established players with, in many cases, pristine balance sheets, but they’re embarking upon almost unprecedented capital investment,” Moody’s vice president Kevin McNeil said on the ratings firm’s Credit Currents podcast. “And this increase in capital intensity is likely going to pressure credit metrics and is going to lead, in some cases, to negative free cash flow or at least diminished free cash flow.” Moody’s estimates direct debt at the six companies is roughly $460 billion, and McNeil said debt financing “could lead to increasing leverage and additional risk being borne on their balance sheets.” Meanwhile, UBS Global Wealth Management, in its commentary, suggested investors could be alarmed again this week:
That’s because, according to its analysts, “limited visibility on capex beyond 2027 amid greater investor demand for spending discipline could continue to weigh on investors’ risk appetite, despite solid AI demand.”
However, UBS advised that, despite the AI capex concerns and inflation worries surrounding the US-Iran conflict, keeping the faith is the best move: “For well-diversified, long-term investors, staying invested remains the most effective strategy to navigate current uncertainty. Given robust earnings growth and an improving cyclical backdrop, we see attractive equity opportunities across sectors and regions.”
