After Alphabet's first ever report of negative quarterly cash flow, the stock bounced back strongly. Shares climbed over 9% following the announcement on July 22, seemingly ignoring the financial warning. Despite these troubling signs, the U.S. stock market has stayed resilient, trading near record levels.
Meta Platforms experienced similar mixed reactions after reporting its lowest free cash flow in almost four years on July 29. While the stock didn’t collapse, it showed little upward movement. Current stock prices are about where they were when the earnings were announced, even with analysts forecasting continued negative cash flow for the year.
Investor Optimism Amid Financial Concerns
Brad Conger, chief investment officer at Hirtle & Co., warns that investors are holding onto the belief that cash flow problems will resolve quickly. He calls this mindset risky, noting that companies like Alphabet and Meta now depend on creditors for continued support. He likens this situation to the “kindness of strangers,” a phrase from the final line of the Tennessee Williams play A Streetcar Named Desire, which illustrates the idea of relying on uncertain help to fund ambitious goals.
The AI boom has already generated massive debt, with global markets absorbing about $570 billion. Citadel Securities predicts an additional $500 billion in borrowing by 2028, much of it in high-grade corporate bonds to fund AI infrastructure. If realized, this could take up more than 5% of the Bloomberg US high-grade index by 2028. Nikkei recently reported that just five U.S. hyperscalers have combined off-balance-sheet liabilities of about $1.65 trillion.
Growing Skepticism and Big Investments
Although the market seems to be absorbing the increasing debt, Conger points to rising skepticism among investors. He said people are becoming less sure about the returns from these investments, citing the widening spreads between the debt issued by AI hyperscalers and U.S. Treasury yields. These growing spreads suggest investors are becoming more uncertain about long-term returns and might be cautious about the companies' ability to deliver.
Massive Capital Investments in AI
The four biggest players in the data center expansion — Alphabet, Meta, Microsoft, and Amazon — are making huge capital investments. Together, they're expected to spend nearly $2.4 trillion in the coming years to build AI infrastructure. These investments include physical buildings, energy systems, leasing, and hardware. However, the long-term cost could be a heavy burden. As Conger noted, the depreciation from these significant purchases will continue to impact profits for years.
Sameer Samana from the Wells Fargo Investment Institute has pointed out that investors remain uncertain about how long the AI buildout will continue. Marta Norton, chief investment strategist at Empower, agrees, adding that the financial returns from the AI boom are unclear. “What the return on the buildout will look like is a very valid question,” she said.
Long-Term Risks of Debt and Slowdown
Conger's concerns reflect a broader trend. The reflexive assumption among investors that current challenges are temporary may mask the deeper risks of long-term debt accumulation and the potential for a slowdown in AI adoption. If the demand for AI-driven computing power doesn’t increase at expected rates, the financial strain on these companies could become unsustainable. This is particularly true given the scale of their capital commitments.
The market’s current resilience seems to rely heavily on expectations that AI will continue to drive economic growth and technological disruption. However, the reality of these promises remains unproven at scale. The $2.4 trillion investment plan by the four largest players is based on the premise that demand for AI infrastructure will remain robust. If this demand falters, the financial impact could ripple through both the tech sector and the broader economy.