$667 billion frenzy! Giant AI spending approaches its peak, free cash flow may hit bottom and rebound

Artificial intelligence-driven capital expenditures are reshaping the balance sheets of large technology companies. According to Goldman Sachs, capital expenditures for hyperscale cloud companies are expected to approach $667 billion this year, accounting for about 92% of their operating cash flow, leading to a significant reduction in stock buybacks and a drop in free cash flow yield to historic lows.

Goldman Sachs analysts believe that 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 value these companies based on profitability, and the currently suppressed valuations may face a repricing opportunity.

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

Record Capital Expenditures Consume Most Cash Flow

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

It is noteworthy that market expectations for capital expenditures are being continuously revised upward. Since the fourth quarter earnings season, analysts have raised their consensus expectations for 2026 capital expenditures by $127 billion, and expectations for 2027 have been raised by $162 billion, indicating a strong confidence in the sustainability of AI investments.

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

Sharp Decline in Stock Buybacks Pressures Shareholder Returns

The sharp expansion of capital expenditures is directly impacting shareholder returns. According to Goldman Sachs data, total stock buybacks for hyperscale cloud companies are expected to decline by 15% year-on-year in 2025, with the proportion of buybacks in cash flow plummeting from 43% at the beginning of 2023 to about 16% currently, a decline of over 60%.

This shift means that during the peak phase of the AI investment cycle, tech giants are clearly prioritizing capital allocation from shareholder returns to infrastructure construction. For investors who rely on buybacks to support earnings per share growth and stock performance, this structural change poses a significant pressure.

Slowing Growth May Mark a Turning Point, Valuation Repair Path Becomes Clearer

Goldman Sachs expects that the growth rate of capital expenditures for hyperscale cloud companies will begin to slow down in the second half of 2026. Scenario analysis shows that by then, the year-on-year growth rate of capital expenditures will be around 70% to 75%, with the annual growth rate roughly comparable to that of 2025, but the quarter-on-quarter growth rate will show a significant slowdown in the second half.

Goldman Sachs points out that the slowing growth rate of capital expenditures will give investors visibility into the potential bottoming of free cash flow, and the recovery of free cash flow will restore the market's ability to value these companies based on profitability. From a valuation perspective, ultra-large-scale cloud computing companies are currently trading at a 24 times expected price-to-earnings ratio, which is at the 14th percentile over the past decade; the valuation premium of the "Magnificent Seven" relative to the S&P 493 constituents has also fallen to a ten-year low. Technically, the stock prices of the Mag 7 have recently rebounded after touching the 200-day moving average at the lower end of the range, and the market may be waiting for confirmation signals of a fundamental turning point.

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