On Wednesday, US technology giants led the broader market higher. Investors are betting that a Democrat-controlled Congress will slow the massive artificial intelligence (AI) spending that has been devouring free cash flow. Amazon.com Inc (AMZN.US) surged as much as 8.3% intraday, Microsoft Corp (MSFT.US) climbed 7%, Alphabet Inc (GOOGL.US) rose 5.9%, and Meta Platforms Inc (META.US) gained 3.6%. Together with Apple Inc (AAPL.US), which had previously avoided AI-heavy capital expenditure and briefly rose more than 6%, these five tech giants are expected to add nearly $1 trillion in combined market value.
The Democratic Party secured majority seats in both the House and Senate in Tuesday's elections, flipping seats in traditionally Republican strongholds such as South Carolina, Texas, and Kansas, and winning local election ballots to control multiple state legislatures and governor positions. One of the core platforms their candidates campaigned on was slowing AI development, particularly scrutinizing the construction of large-scale data centers needed to run this emerging technology.
"The market is behaving as if this represents the end of the AI buildout cycle," said Robert Pavlik, senior portfolio manager at Dakota Wealth Management. "If it means hyperscalers will no longer spend enormous sums building computing capacity, that means they could return to generating positive free cash flow."
Keith Parker, head of global macro equity strategy and US equity strategy research at UBS, wrote in a note to clients on Wednesday that exit polls show voters strongly oppose new data centers being built in their communities. "The 'blue wave' will have an impact on stocks, with the biggest effect likely coming from recent state-level tightening of data center regulation," he wrote.
Shares of Amazon.com Inc (AMZN.US), Microsoft Corp (MSFT.US), Alphabet Inc (GOOGL.US), and Meta Platforms Inc (META.US) have been under sustained pressure recently. Investors are increasingly concerned that these companies are investing hundreds of billions of dollars in computing infrastructure without generating sufficient returns. Meanwhile, free cash flow at Amazon.com Inc (AMZN.US), Alphabet Inc (GOOGL.US), and Meta Platforms Inc (META.US) has all turned negative, meaning their capital expenditure exceeds operating cash flow. As a result, these companies have been forced to tap debt and equity markets to finance their spending.
As of Tuesday, the Bloomberg index tracking the "Magnificent Seven" tech stocks had fallen 5.9% since Meta Platforms Inc (META.US) kicked off the so-called hyperscaler earnings season on October 21, leaving the sector with just a 4.1% gain this year, trailing the S&P 500 and Nasdaq 100. On Wednesday, the index rose as much as 3.6%, even as chipmaker NVIDIA Corp (NVDA.US) and Tesla Inc (TSLA.US) — the biggest beneficiaries of the data center buildout wave — declined.
Pavlik said that although Wednesday's trading was highly speculative, it underscores how important free cash flow has become to investors. "Hyperscalers have been caught in a dilemma: spending gets punished, but cutting back also raises questions," he said. "In a sense, the election is a gift to hyperscalers — the brakes are being applied, not by companies, but by the government."
Comments