Massive AI Spending Is Coming Under Scrutiny

Spending to support the rapid expansion in artificial intelligence (AI) is suddenly under fire.

One by one, AI hyperscalers are boosting their outlook for capital expenditures (capex) in a race to stay relevant in AI.

During its most recent earnings call, Google-parent Alphabet (GOOG) projected up to $185 billion in capex to support AI infrastructure. That’s double what the company spent last year. But that sum only puts Alphabet in second place.

Amazon (AMZN) announced on its earnings call that the company is projecting $200 billion in capex in 2026, which is a 51% increase from 2025’s level.

For investors anticipating more gains from AI stocks, the spending plans should sound like good news.

But instead, a dramatic shift in the market’s reaction is a warning for the AI trade…

Record AI Capex

During earnings season, investors and analysts tend to focus most on beats and misses across sales and earnings.

But now AI stocks are facing greater scrutiny on their capital allocations – or how they intend to spend on things like stock buybacks, dividends, or capex.

You usually don’t see the market fuss much over capital allocation. The most excitement often comes from stock buybacks, when companies use excess cash to buy back their own shares in order to boost the stock price.

But now investor focus is falling squarely on capex among AI’s biggest hyperscalers. That includes Amazon and Alphabet, along with Meta Platforms (META) and Microsoft (MSFT). Collectively, those four hyperscalers are projected to spend nearly $700 billion this year to support the AI buildout.

Rising levels of capex used to be a vote of confidence on AI’s transformative potential. Investors often greeted it with enthusiasm.

But now the concern is that the return on investment doesn’t justify the massive sums being spent… all while capital allocation eats into cash flow.

So the stock market’s latest response to those spending plans should concern you…

AI Spending Is Eating Into Cash

For a bull market that was born alongside the launch of ChatGPT back in late 2022, the shift in market sentiment toward hyperscaler capex spending is something you need to watch carefully.

Following their earnings calls, MSFT sank by 10%, while AMZN dropped 5%. GOOG fell as much as 8% after its call before reversing the decline.

It’s easy to see why spending plans are under scrutiny. With the rapid increase in spending, cash flow is taking a hit.

Microsoft is the only hyperscaler with projected cash flow in excess of capex this year. That means other hyperscalers are expecting to see their free cash flow go negative. Many are taking on debt to fund the shortfall. Alphabet is making headlines this week for its plans to issue a 100-year bond as part of its debt issuance to raise $32 billion.

You have to go back to the internet bubble for the last time a tech company (Motorola) issued 100-year bonds.

Morgan Stanley expects borrowing by hyperscalers to reach $400 billion this year, which is up from $165 billion in 2025.

As spending to fuel the AI buildout shows no signs of slowing, investors are starting to question whether the money being spent will have enough reward to balance the jump in debt borrowing.

Given the bull market’s reliance on AI optimism, the shift in investor sentiment is delivering a warning on the outlook…

Happy Trading,

Larry Benedict
Editor, Trading With Larry Benedict

P.S. Earnings calls are great at providing key insights like this one on AI capex… and if you know how to trade these moments, you can turn them into big profits.

That’s what I discussed during my Wall Street Money Calls event last night. Specifically, I shared eight key signals that I keep close watch on during earnings calls that can help pinpoint trading opportunities.

If you weren’t able to attend, a replay will be available online for just a few days. To watch, go here now.