$667 Billion Frenzy! Tech Giants’ AI Spending Nears Its Peak, Free Cash Flow May Hit Bottom and Rebound

$667 Billion Frenzy! Tech Giants’ AI Spending Nears Its Peak, Free Cash Flow May Hit Bottom and Rebound

AI-driven capital expenditures are reshaping the balance sheets of major tech companies. According to Goldman Sachs, hyperscale cloud enterprises' capital expenditures this year are expected to approach $667 billion, accounting for about 92% of their operating cash flow, leading to a sharp drop in stock buybacks and historical lows for free cash flow yield.

Goldman Sachs analysis believes the growth rate of this capital expenditure frenzy is expected to slow down in the second half of 2026, providing visibility for a rebound in free cash flow. Once free cash flow begins to recover, investors will be able to resume valuing these companies based on profitability, and the currently suppressed valuations may be repriced.

In terms of valuation levels, hyperscale cloud enterprises are currently trading at 24 times expected earnings, which is at the 14th percentile of the past decade; the valuation premium of the "Tech Magnificent Seven" relative to the S&P 493 constituents has also dropped to a ten-year low.

Record-high capital expenditures devour most of the cash flow

According to FactSet data, analysts expect the total capital expenditures of hyperscale cloud enterprises to reach $667 billion in 2026, representing a year-on-year growth rate of about 62%, slightly less than the 73% increase in 2025, but the absolute scale is still historically rare.

It is noteworthy that market expectations for capital expenditures continue to be revised upward. Since the fourth quarter earnings season, analysts’ consensus expectations for capital expenditures in 2026 have been raised by $127 billion, and for 2027 by $162 billion, indicating a high degree of confidence in the sustainability of AI investment.

However, the scale of capital expenditures is putting severe pressure on cash flows. According to Goldman Sachs, hyperscale cloud enterprises' capital expenditure is expected to account for 92% of their operating cash flow, with a significant decline in free cash flow conversion rates and a drop in free cash flow yield far outpacing the overall S&P 500.

Stock buybacks plunge, shareholder returns face pressure

The surge in capital expenditures is directly impacting shareholder returns. According to Goldman Sachs, total collective stock buybacks by hyperscale cloud enterprises in 2025 are expected to decline by 15% year-on-year, with buybacks accounting for about 16% of cash flow, down sharply from 43% at the start of 2023, a drop of more than 60%.

This shift means that at the peak of the AI investment cycle, tech giants are clearly prioritizing infrastructure over shareholder returns in their capital allocation. For investors relying on buybacks to support EPS growth and share price performance, this structural change poses significant pressure.

Slower growth may mark a turning point, valuation recovery path becomes clearer

Goldman Sachs forecasts that the capital expenditure growth rate of hyperscale cloud enterprises will begin to slow in the second half of 2026. Scenario analysis shows capital expenditure growth will be about 70% to 75% year on year at that time, roughly equivalent to 2025's annual growth, but the quarterly growth rate will see a clear slowdown in the second half of the year.

Goldman Sachs points out that the slowdown in capital expenditure growth will give investors visibility into the potential bottoming of free cash flow, and the recovery in free cash flow will allow the market to once again value these companies on the basis of profitability.

In terms of valuation, hyperscale cloud enterprises are currently trading at 24 times expected earnings, at the 14th percentile of the past decade; the "Tech Magnificent Seven"'s valuation premium relative to S&P 493 constituents is also at a ten-year low. Technically, the Mag 7 group recently rebounded off the 200-day moving average at the lower end of its trading range, and the market may be awaiting confirmation of a fundamental turning point.

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