Signs of Strain Could Be Emerging in the AI Spending Boom

Cracks in Big Tech’s artificial intelligence-fueled spending binge could be forming across stocks and bonds.

Wall Street was displeased last week when Alphabet and Tesla Motors raised their forecasts for capital expenditure—known as capex—for the rest of the year.

While market watchers await spending updates from other AI hyperscalers as they release their latest earnings reports over the coming weeks, total capex in 2026 is expected to reach up to $1 trillion.

A year ago, investors cheered these ambitious investments. Under current market conditions, traders are now more cautious as the leading tech giants see their free cash flows turn negative and rely on debt and stock sales to fund the AI infrastructure buildout.

Based on how stocks have performed, investors are expressing doubts they can generate similar returns over the last few years on escalating AI capex.

Investor sentiment could be on display this week as they parse earnings reports from Amazon, Apple, Meta Platforms, and Microsoft to determine whether they are also revising their capex projections upward.

“This week is important because strong AI spending must work its way through the entire chain,” Jay Woods, chief market strategist at Freedom Capital Markets, said in an emailed note to The Epoch Times.

“Hyperscaler capex should ultimately translate into more equipment orders, advanced packaging, testing volumes, memory demand, and chip content. After such a strong run, these results will need to support the elevated expectations already reflected in many of the stocks.”

Market consternation has also been evident in the corporate bond market.

Forging an AI Bond

Scores of tech firms, from Nvidia to SpaceX, have begun tapping capital markets in recent months, selling billions of dollars in corporate bonds.

In the first half of 2026, debt-funded hyperscaler capex contributed to a 26 percent year-over-year spike in U.S. corporate bond issuance, according to Fitch Ratings.

What happens in the second half could test financial markets.

“The pipeline of planned debt and equity issuances in 2H26 will test market capacity to absorb new supply while equity valuations remain elevated and reliant on optimistic AI return assumptions,” Fitch said in a July 23 note.

Not only is hyperscaler debt issuance accelerating, but it could also reshape dynamics across global financial markets.

“The U.S. credit outlook is increasingly levered to AI investment confidence, while consumer-facing sectors and private credit markets face mounting headwinds,” the credit rating agency stated.

Despite general optimism about AI’s future impact on the global economy, investors are becoming impatient, demanding greater compensation for waiting to realize returns on these enormous investments.

Not only are bond prices sinking and yields climbing, credit default swaps—insurance against a borrower not paying back its debt—have surged.

Oracle’s five-year credit default swaps reached levels unseen since the Global Financial Crisis almost 20 years ago, quadrupling since the middle of last year.

Since S&P Global downgraded Oracle’s credit rating to BBB—one notch above junk status—the tech company’s bonds have become one of the barometers on Wall Street’s dashboard determining the AI boom’s health.

“The industry’s rapid capacity expansion is a growing risk. Near-term demand is strong, but this could reverse if leading frontier model developers are unable to raise external financing or stop subsidizing their customers,” S&P said in its July 9 rating action. “Enterprise customers could also reduce AI spending if their returns on investment underwhelm.”

Tech companies used to operate under asset‑light models built around software, intellectual property, and cloud services that required little capital.

Now these firms are shifting to asset‑heavy businesses, a change that demands far more investment and fundraising than before, says Kevin McNeil, Moody’s vice president, in the company’s “Credit Currents” podcast on July 23.

“These companies are very large established players with, in many cases, pristine balance sheets, but they’re embarking upon almost unprecedented capital investment,” McNeil said.

This rise in capital needs will put pressure on their credit metrics and could possibly push free cash flow into negative territory or reduce it significantly, he added.

U.S. stocks wobbled to kick off the final trading week of July. The tech-heavy Nasdaq Composite Index dipped about 0.4 percent, while the blue-chip Dow Jones Industrial Average edged up 0.3 percent. The broad-market S&P 500 was little changed.