Alphabet and Tesla took a hit from soaring AI spending. Will Microsoft, Meta and Amazon be next?

Big Tech’s binge is draining free cash flow – and the bond markets are taking notice

Rising capital expenditures and declining free cash flow are troubling signs for Big Tech leaders including Amazon.com, Microsoft and Google parent Alphabet.

Risk could spread beyond Big Tech companies to the semiconductor businesses supplying the hardware behind their AI ambitions.

Big Tech is in focus, as Microsoft (MSFT), Amazon.com (AMZN), Apple (AAPL) and Meta Platforms (META) report earnings this week. Wall Street will be looking closely at free cash flow, capital expenditures and growth. Among the tech giants, Apple has kept capital spending relatively restrained, while the others have seen capital expenditures soar and free cash flow decline.

Shares of Alphabet (GOOGL) (GOOG) and Tesla (TSLA) both took a hit last week after the companies’ quarterly results, as investors soured on their declining free cash flow and rising capital expenditures.

As these companies continue to spend, many have increasingly tapped the capital markets to finance their artificial-intelligence infrastructure buildouts. At the same time, credit default swaps for many of these companies have widened notably. That may suggest that credit investors are demanding more protection as debt issuance increases and capital spending accelerates, or that they are simply reassessing the credit risk associated with these increasingly capital-intensive business models. Either would mark a departure from how the market has viewed these companies.

One reason this may be happening is that analysts forecast free cash flow for these companies to fall dramatically over the next 12 months as they increase spending. The one exception among Big Tech companies is Apple, which is instead expected to see free cash flow rise because of its more measured approach to AI-related capital spending.

Consensus estimates suggest that Apple’s capital expenditures over the next 12 months will remain relatively low, at around $13.4 billion. Meanwhile, Tesla’s spending is expected to reach close to $22 billion, which is still modest compared with Meta at $142 billion, Microsoft at nearly $180 billion, Amazon at $216 billion and Alphabet at almost $252 billion.

Rising capital expenditures and declining free cash flow mean these companies may become increasingly reliant on external financing, whether through debt or equity. At the same time, CDS spreads have been widening, suggesting credit investors are becoming less comfortable with that shift. Companies once viewed as abundant free-cash-flow generators are now being valued against a backdrop of much heavier investment spending, and in some cases their stock prices have already begun to reflect that change.

In the second quarter of 2026, Alphabet’s capital expenditures jumped to $44.9 billion from $22.5 billion a year ago. Analysts are forecasting that Amazon’s capital expenditures will rise to $48.2 billion from $32.2 billion, while Microsoft’s are expected to increase to $35.1 billion from $17.8 billion and Meta’s to $33.7 billion from $17.6 billion. Apple, meanwhile, is expected to spend roughly $3.4 billion, up from $2.5 billion last year. This may be one of those situations in which beating expectations is not necessarily a good thing.

Analysts expect free cash flow to remain under pressure. Alphabet already reported second-quarter free cash flow of negative $5.9 billion, compared with positive $5.3 billion a year ago. Microsoft is expected to report free cash flow of $17.4 billion this quarter, down from $25.6 billion last year. Meta is expected to report negative $178.4 million, compared with positive $9 billion a year ago, while Amazon’s is forecast to decline to negative $3.8 billion from positive $332 million a year ago. Apple is the exception, with free cash flow expected to rise to $30.1 billion from $24.4 billion.

The price of unintended consequences

If the hyperscalers’ spending slows because financing costs rise or free cash flow weakens, semiconductor demand could eventually feel the effects.

Heavy spending and declining free cash flow create an unintended consequence, meaning that these companies must either find additional ways to finance their investments or eventually begin cutting back. That is when the risk begins to extend beyond the megacap technology companies to the semiconductor businesses supplying the hardware behind their AI ambitions.

The semiconductor companies are dependent on hyperscaler spending. If those customers eventually slow capital expenditures because financing costs rise or free cash flow weakens, semiconductor demand could eventually feel the effects. The widening CDS spreads for Nvidia (NVDA), Broadcom (AVGO) and AMD (AMD) are particularly surprising because these businesses continue to generate strong and rising free cash flow.

Following Alphabet’s results and its announcement that spending would increase, its stock fell sharply, and its CDS spread widened. If the other hyperscalers also announce higher capital spending while free cash flow continues to weaken, investors may respond similarly.

While most investors will naturally focus on whether each company beats revenue and earnings estimates and provides better-than-expected guidance, the credit markets are likely to be watching a different set of metrics: capital expenditures, free cash flow and funding needs.

If capital spending continues to accelerate while free cash flow deteriorates, it would reinforce the trend already developing in credit markets and could make it increasingly difficult for these Big Tech companies to sustain the premium valuations they have historically enjoyed. Ultimately, the implications could extend across the entire AI supply chain.

Michael Kramer is the founder of Mott Capital Management and a long-only investor focused on macroeconomic themes. He analyzes long-term macro trends and short-term market risk using technical analysis, fundamentals and options-market positioning. Kramer and clients of Mott Capital own AAPL, MSFT, AMZN and GOOGL.

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