A Turning Point Approaches for Big Tech Spending
Peak Capex?
AI-driven capital spending has reshaped Big Tech balance sheets, with hyperscalers set to spend nearly $667 billion this year, absorbing roughly 92% of operating cash flow. But growth is expected to decelerate in late 2026, potentially marking a turning point for free cash flow and valuations.
667
Analysts now expect AI hyperscaler capex will total $667 billion in 2026. Their estimates imply capex growth in 2026 of 62% year/year, compared with 73% growth in 2025.
Source: FactSet
Sharply higher
Consensus hyperscaler capex estimates have been revised sharply higher. Consensus estimates for hyperscaler capex have risen by $127 billion since the start of the 4Q earnings season. Consensus estimates for hyperscaler capex in 2027 have risen by $162 billion.
Source: FactSet
Eating all the cash
Hyperscaler capex estimated to account for 92% of cash flows from operations.
Source: Goldman
That FCF yield
Hyperscalers FCF yield has fallen by much more than the S&P 500.
Source: FactSet
That FCF conversion
Hyperscaler free cash flow conversion has declined sharply.
Source: FactSet
Bye bye buybacks
The hyperscalers cut their collective gross buybacks by 15% year/year in 2025. The share of their cash flows allocated to buybacks has declined from 43% at the start of 2023 to just 16% today.
Source: Goldman
Starting to decelerate
GS: "We expect the hyperscaler capex growth rate will begin to decelerate later in 2026. The scenarios would imply capex growth equal to roughly 70-75% year/year. For the full year, that would imply a growth rate similar to 2025, but would imply a deceleration in the quarterly growth rate in the second half of 2026."
Source: Goldman
Trough catalyst
GS: "Decelerating capex growth would give investors line of sight to a potential trough in free cash flows. We believe a recovery in free cash flows would allow investors to start to value the hyperscalers on an earnings basis again."
The hyperscalers trade at 24x forward EPS, ranking in the 14th percentile versus the past 10 years.
Source: Goldman
10-year low
Mag 7 are trading at the lowest premium vs. S&P 493 in last 10 years.
Source: GIR
Bounce
MAG has bounced right on range lows, basically touching the 200 day some sessions ago.
