Cracks appear in AI spending boom

Investors are growing nervous about spending on AI infrastructure, just as big tech companies are doubling down.

In the past two weeks, Alphabet, Amazon, Meta and Microsoft have announced plans to spend more than $740 billion in capital spending this year, which Wall Street considers spending on AI infrastructure, including data centers and chips.

Earlier in the AI ​​boom, investors largely rewarded such large spending, seeing it as a sign of confidence in the technology’s growth potential. But as we enter the fourth quarter, that enthusiasm appears to be giving way to concerns about negative free cash flow (spending more cash than a company brings in), growing debt, and questions about whether these huge investments will ever generate enough return.

Anxiety spread throughout the market on Friday. The Nasdaq fell 2.9%, and chip stocks were also hit hard: Nvidia fell 4%, Broadcom more than 5%, and Qualcomm 11%. Alphabet, which fell 12% on Thursday, its worst day on record, wiping out $500 billion in market value, fell again.

Much of the concern is that companies that previously had overflowing free cash flow from their core businesses are being hit, as AI threatens the economics of these companies. Alphabet provided the clearest example this week. Google’s parent company reported negative free cash flow of $9.1 billion in the third quarter, its second consecutive quarter in the red, even as quarterly investments reached $51.4 billion. Alphabet plans to spend up to $205 billion this year and expects that spending to continue to rise in 2027.

Meanwhile, the runaway success of AI Mode – Google’s AI-powered chatbot functionality built directly into search – is eating into the company’s revenue. Google’s search advertising business, which accounts for about half of its revenue, saw growth slow to 12%, its slowest pace in five quarters. This leaves Google on a tightrope. It is spending billions on AI technology, which could harm the research sector that funds it.

Amazon is in a similar situation after reporting negative free cash flow of $42.4 billion over the past 12 months, compared to $14.8 billion in positive free cash flow the year before. The company says it plans to spend $220 billion on investments this year. Even though revenue from its cloud business, AWS, rose 39%, Amazon shares fell 7% after reporting earnings on Thursday.

Meta is also burning cash, reporting negative free cash flow of $2.1 billion in the third quarter as investments outpaced its operating cash. This represents up to $145 billion in investments this year. The company noted that Muse, its new free personal AI agent, is a bit of a money pit (it’s “very computationally intensive” to operate, CEO Mark Zuckerberg said). But advertising revenue increased by 26%. Still, no amount of good news stopped Meta from suffering a 10% drop in its stock last week.

Microsoft was the lone exception when it came to free cash flow: The company reported positive free cash flow of $18.6 billion in its most recent quarter, with capital expenditures of $45.2 billion, less than the $50 billion forecast. Microsoft said this was not an intentional retreat from AI spending, blaming capacity delays from third-party vendors. As a result, shares of small companies that lease AI computing power have fallen.

It’s worth noting that the money needed to fund all this AI infrastructure doesn’t just come from the profits of big tech companies. This also shows up in stock and bond sales. According to S&P Global Market Intelligence, Microsoft, Alphabet, Amazon, Meta and Oracle have raised a combined $326 billion in debt in 2026, triple the amount raised last year.

Demand for AI computing remains strong. Google, Amazon and Microsoft have all seen gains in their cloud businesses. But investors are spooked by the costs of meeting this demand.

These murky waters could complicate Anthropic’s highly anticipated IPO. The AI ​​company filed for an IPO earlier this week, and its future growth depends on securing massive amounts of computing. The Financial Times reported on Friday that Blackstone had warned investors that the company may not qualify for an investment grade rating after its IPO, meaning it could end up being more reliant on hyperscalers and third parties to fund its infrastructure ambitions.