By James Mackintosh

Amid the wild surge in AI spending, investors in listed companies are making the same demand they have for years: Show me the money. It may not be enough to prevent a lot of wasteful corporate investment, and it definitely doesn't apply to private artificial-intelligence developers, but it's a sign that the market isn't completely unhinged.

Alphabet and Meta showed with their quarterly results this week that the most important thing to investors is making a return on AI spending. Both increased their already vast capital-spending plans. Both spent most of their time with Wall Street analysts talking about AI and new products.

But Alphabet shares rose after it focused on how it is selling basic AI services today. Meanwhile, Meta's stock slumped 11% after it emphasized aggressive investment to get ahead in the hope that what it calls "superintelligence" comes earlier than expected.

The performance gets to the heart of how markets work. In normal times investors prefer companies that generate more profit with less capital -- with the ideal being a firm with what Warren Buffett calls a "moat" protecting its business from too much competition.

The alternative is speculative investment in the hope of big profits at some point in the future. This is a hallmark of venture capital and a handful of stocks driven by private investors, typically with a chief executive able to articulate a strong narrative about that future. Tesla is the modern archetype: a car company with much broader ambitions and a never-ending story about vast success on the way...soon.

In bubbles, everyone gets caught up in the idea that spending on the hot theme will deliver vast profits eventually. When the bubble is big enough, it shifts the behavior of the market as a whole from disliking capital expenditure, and hating speculative capital spending in particular, to loving it.

So far, that doesn't seem to have happened.

The history of investor views of capex is neatly measured by what finance professors Eugene Fama and Kenneth French dubbed the "investment factor," the old tendency of stocks in companies that invest the most to lag behind. From the 1960s through to the early 2000s, companies that increased capex the most were pretty consistent laggards.

The two big exceptions were the Nifty Fifty boom of the late 1960s and early 1970s, briefly interrupted by a recession, and the dot-com bubble of the late 1990s. In both periods of excess investors thought companies could invest successfully, and rushed to buy the heaviest spenders before, as usual, being disappointed.

Over the past quarter-century, however, a greater focus on corporate governance and a new investor appreciation of return on capital helped limit management hijinks. The stocks of companies that invested the most no longer fell behind those of stingier companies, but didn't beat them by much either.

Before I checked the data, I expected the new AI boom to show up in a renewed investor love of capex, similar to the bubbles of the past. Who wants dull stocks that merely make predictable profits and give them back to shareholders, when you could bet on the creation of our new robot overlords?

In fact there's little sign of a shift in the investment factor, which has behaved perfectly normally this year, with higher-spending big companies tending to underperform a little. It doesn't show up in investor attitudes to buybacks, either -- another gauge of whether they prefer companies to return capital to investors or spend it.

The S&P 500 buyback index, which holds the 100 S&P companies repurchasing the most shares, rose about in line with the rest of the market this year, aside from a wobble this week. The same goes for a more stringent Nasdaq index that includes only businesses that buy back so much they cut their share count by 5%. Investors continue to like buybacks.

Sure, performance for indexes of "dividend aristocrats" and high dividend payers has been abysmal -- and it is because of AI. But it isn't because of capital spending. The problem with buying based on dividends is you miss out on almost all of the tech sector, and these shares, along with some Big Tech stocks that sit in other sectors, have driven gains this year.

None of this proves there isn't an AI bubble, of course. Valuations of private AI companies such as OpenAI are absurd, and the money pouring into data centers is so big it is measured as a share of GDP. But, so far at least, the speculative fervor visible in markets hasn't translated into investors in big listed companies abandoning their preference for a bird in the hand.

Write to James Mackintosh at james.mackintosh@wsj.com

(END) Dow Jones Newswires

October 31, 2025 20:00 ET (00:00 GMT)

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