MW 4 charts show why massive AI spending has started to weigh on Big Tech

By Joseph Adinolfi

Spending on capital projects like AI data centers is expected to eat up all of hyperscalers' cash flows in 2026, UBS says

"The market hates companies that are in investment cycles," a Wells Fargo analyst said.

Over the past few months, shares of the hyperscalers - an elite group of Big Tech names - have gone from market leaders to market laggards.

The move has come as a surprise to some, and Wall Street analysts still expect these companies to see their profits grow more quickly than the average publicly traded American company in 2026.

But in a report shared with MarketWatch on Tuesday, Wells Fargo equity analyst Ohsung Kwon and his team shared a few key findings that might help to explain why investors' enthusiasm for Big Tech has started to cool.

As the hyperscalers have plowed more money into building data centers, their once sizable free cash flow has diminished to the point where free cash flow margin, which compares free cash flow to total sales, is now broadly on par with the S&P 500 as a whole. With much of their cash flows already committed to the artificial-intelligence buildout, these companies have started to turn to the debt markets, a trend that Kwon and his team believe is just beginning.

Scrutinizing the outlook for hyperscalers' cash flows has proved to be a popular theme on Wall Street as of late. A team of analysts at UBS Group said on Tuesday that hyperscalers' capital expenditures could reach $700 billion this year, enough to consume practically all of their cash flow from operations.

This shift away from relying on cash flows and toward relying on debt has started to make investors nervous. Kwon and his team cautioned that although this transition is still in its early innings, shares of these companies are already feeling the pinch.

This is understandable, given that the surge in investment spending has started to dampen the formerly high returns on invested capital for which these highflying tech companies had once been known.

Wells Fargo calculated that the return on incremental invested capital for the hyperscalers has gone from being exceptional to being roughly equivalent to that of the average S&P 500 company. As companies like Amazon.com (AMZN) and Microsoft $(MSFT)$ have continued to boost their spending plans beyond what Wall Street analysts have expected, there will likely be less money left over to return to investors in 2026 and 2027. Alphabet Inc. completed a $20 billion U.S. bond offering on Monday and is now planning to issue debt in foreign currencies, including a 100-year bond denominated in British pounds.

Kwon and his team focused their analysis on the four big hyperscalers: Amazon, Meta Platforms (META), Alphabet $(GOOGL)$ and Microsoft, whose shares have largely struggled since October. Although Kwon and his team didn't include it in their analysis, Oracle Inc. $(ORCL)$ is sometimes lumped in with the hyperscaler cohort.

Some have warned that a possible retreat in corporate buybacks this year could potentially be a tailwind for the broader market. Nomura cross-asset strategist Charlie McElligott warned about this risk months ago.

Devoting more money to capital expenditures is forcing the hyperscalers to cut back on returning capital to investors.

For members of the group of megacap tech stocks known as the Magnificent Seven as well as other technology stocks, the total shareholder return - calculated as dividends plus share buybacks as a percentage of sales - has fallen to the lowest level since the dot-com boom, Wells Fargo found.

Until recently, investors had cheered this massive capital investment. But the enthusiasm appears to have cooled since the start of the fourth-quarter earnings season, as shares of Microsoft and Amazon have struggled after reporting their latest numbers.

This roughly aligns with how investors have responded to previous capital-investment cycles, Kwon said. If history is any guide, it could be the beginning of a prolonged stretch of underperformance.

"The market hates companies that are in investment cycles," Kwon said.

One last risk worth highlighting: While the recent selloff in software stocks grabbed investors' attention, Kwon and his team warned that creeping doubts about OpenAI's competitiveness have also weighed on the tech sector. OpenAI has close financial ties with some of the hyperscalers, including Oracle.

Where should investors put their money instead? Kwon said his basket of cyclical versus defensive stocks has yet to price in the pickup in economic activity being hinted at by recent purchasing managers index readings. With global growth expected to accelerate in 2026, Kwon and his team like small caps, commodities stocks and semiconductors.

-Joseph Adinolfi

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February 10, 2026 14:44 ET (19:44 GMT)

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