The artificial intelligence boom is demanding unprecedented capital expenditure from tech’s largest players, triggering a cash flow crunch that is unsettling investors and raising questions about the sustainability of the current investment levels. Alphabet, Amazon, Meta, and Microsoft are collectively planning to invest nearly $700 billion in AI infrastructure this year – a 60% increase over 2025 – but the scale of the spending is prompting a reassessment of valuations and a growing concern that returns may not materialize quickly enough.
The surge in capital expenditure comes as these “hyperscalers” race to secure the computing power, data centers, and networking technology needed to support the development and deployment of increasingly sophisticated AI models. Amazon, in particular, is facing scrutiny, with analysts projecting negative free cash flow of as much as $28 billion this year, according to Bank of America, as it commits $200 billion to capital projects. Alphabet is also feeling the pressure, with projections indicating a nearly 90% drop in free cash flow to just $8.2 billion, down from $73.3 billion in the previous year, as it plans up to $185 billion in investments.
The market reaction has been volatile. More than $1 trillion was wiped from the market capitalization of Big Tech companies last week amid concerns over the scale of AI spending and the uncertainty surrounding future returns. While a partial recovery has occurred, the underlying anxieties remain.
“2026 is a 60% aggregate increase in committed capex on the prior year,” noted Michael Field, chief equity strategist at Morningstar. “At a certain point this bet becomes binary: either demand and monetization follows and pays off the spend, or it doesn’t and the businesses fail. Investors were comfortable when it was a side bet, but when the whole business is at risk, they are much less comfortable.”
The sheer magnitude of the capital outlay is forcing companies to explore new funding avenues. Oracle recently announced plans to raise $45 billion-$50 billion in the 2026 calendar year, and Alphabet is preparing a $20 billion bond sale, according to people familiar with the matter. This shift towards debt financing is raising concerns about balance sheet risk and the potential impact on equity holders.
Bob Savage, head of markets macro strategy at BNY, emphasized the importance of how the spending is financed. “If this increases the net borrowing of mega-caps it takes away from equity holdings,” he said. “Investors are happy to buy debt, as shown by Oracle, but the issue is that it’s reducing free cash flow and puts balance sheets at risk for some.”
Despite the current market jitters, many analysts remain optimistic about the long-term prospects for hyperscalers. Gil Luria, head of technology research at D.A. Davidson, believes that the returns on investment are already becoming apparent. “The returns for the main data center builders (Amazon, Microsoft and Google) are already positive since they are pre-selling all of their capacity before they even build the data center,” he explained. He anticipates further upside as AI usage grows and consumers and businesses are willing to pay a premium for the value created.
However, the timeline for recouping these massive investments remains uncertain. Field cautioned that the estimated useful life of data centers and chips can be as short as three to five years, requiring significant returns by 2030. “Clear timelines around payback periods and ‘credible’ strategies around monetization are needed from hyperscalers to ease concerns,” he said. “Until that happens, investors are likely to continue to balk at further plans to increase capex — which could cause further market jitters in the coming months.”
The situation is further complicated by broader geopolitical concerns. Recent tensions between Europe and the U.S. Have highlighted the region’s reliance on American digital infrastructure, raising questions about digital sovereignty.
Recent Developments: Alphabet is returning to the debt market to fund its AI build-out, after reporting it could shell out $185 billion in capital expenditure this year. Elon Musk’s xAI has experienced a series of departures, with two co-founders, Jimmy Ba and Tony Wu, leaving the company in quick succession. U.S. Proposals to relocate 40% of Taiwan’s semiconductor supply chain to the U.S. Have been dismissed as “impossible” by Taipei’s top tariff trade negotiator. Apple faced its worst trading day since April following reports of delays with Siri and regulatory scrutiny of its news app. Anthropic recently closed a $30 billion funding round at a $380 billion post-money valuation, marking the second-largest private tech raise on record.
