Debt will fuel the next phase of the market, for better or worse

Why Everything In the Market Just Changed

Debt will fuel the next phase of the market, for better or worse.

The AI buildout has been driving the market in incredible ways over the past three years. Memory has exploded, fabs are going vertical, and equipment-makers are on a massive hot streak.

S&P 500 $S&P 500(.SPX)$ heat map over the past year.

What’s unique about this moment is the scale of the value the market has put on all things AI. 45% of the S&P 500’s value is in AI-related stocks.

And those stocks aren’t cheap. Over half of the S&P 500 trades for over 10x sales.

This is something I’ve been concerned about for a while, but it’s taken a turn recently.

Why?

Debt at an unprecedented scale is now involved.

More on that in a moment.

Now, Debt Is Involved

Let’s be clear: most of the hot, highly valued companies I showed in the heat map above depend on the AI buildout to keep growing and maintain high profits and multiples.

And that spending is driven by just a handful of companies.

In the charts below, I’m going to show $Amazon.com(AMZN)$ $Meta Platforms, Inc.(META)$ $NVIDIA(NVDA)$ $Microsoft(MSFT)$ $Oracle(ORCL)$ $Alphabet(GOOG)$ as the companies to watch because they're either directly or indirectly funding the buildout (NVIDIA is pouring money into Neoclouds).

These used to be cash-generating machines. But now, free cash flow is starting to fall, and by the end of 2026, it’s likely we will see this group of companies be free cash flow negative.

Note: NVIDIA’s free cash flow doesn’t fully account for their investments in companies, who they spend money on chips, so if we include investments their cash flow would be much lower.

Here’s the same chart with NVIDIA pulled out.

Just $9.5 billion in free cash flow last quarter for five of the (formerly) most profitable companies in the world.

And plans call for increasing spending across the board.

If they’ve exhausted their operating cash flow, the next step is to borrow money or sell stock to keep funding AI. And just this month, we’ve seen a flurry of activity.

• Alphabet announced an $85 billion equity capital raise earlier this month.

• Oracle said it plans to raise $40 billion to fund the AI buildout over the next year, including $20 billion in debt.

• NVIDIA raised $25 billion in debt last week.

• $SpaceX(SPCX)$ announced this morning it’s looking to raise $20 billion in debt despite having $100 billion in cash on the balance sheet.

Meta and Microsoft haven’t raised debt recently, but they’re aggressively using off-balance-sheet financing to build AI data centers. That may be even riskier long-term.

In just this group of six major tech players, they’ve gone from a net cash position (shown as negative numbers at the bottom of the columns below) to $77 billion in net debt (shown as positive numbers at the top of the columns below).

The fact that hyperscalers who once had hundreds of billions in free cash flow are now taking on debt to build AI — and AI is what’s driving the market.

That’s a risky brew.

And someone (I can’t find the clip) recently pointed out that the unusual thing about this tech boom is that all of this money is chasing the exact same thing. It’s not one company going after CRMs, another making search, another doing shopping, and so on. Everyone is building AI models.

If everyone is building the same thing, who is differentiated for more than a week or two?

Anyways, something to add to your mental model. I’m not jumping on the AI bottleneck bandwagon now.

I think that will be wise long-term, but maybe I’m wrong?