Here we are on February 17 and the S&P 500 is almost exactly flat for the year (as of Friday) after falling a little over 1% last week. This doesn’t worry us. We’ve noted that February has a history of being a banana peel month and many other areas of the market have held up better, providing some added resilience for many diversified investors. We still believe the S&P 500 can very reasonably return 12% to 15% this year, a view we presented in our 2026 Outlook. There’s nothing we’ve seen so far that would change that view. If anything, recent earnings and labor market data have come in better than expected. In the meantime, we’re glad to see some changes in market leadership and a broadening market, another theme we discussed in our Outlook, as leadership rotation is often a sign of a healthy bull market.
This week, we want to provide an update on artificial intelligence (AI). We wouldn’t really call a flat market in under two months a slow start, but we are seeing concerns over AI disruption in the broad market. And some narrower areas of the market, especially software, have been hit much harder by speculation about advancing AI capabilities. The other side of the coin is that AI optimism and fierce competition continue to encourage more capital expenditures. Not every company that spends is going to be a winner, but the overall effort is good for the economy. After all, as we often say, one company’s spending is another company’s profit.
Big Tech Capex Plans Are Ballooning—Is That Good or Bad?
When we wrote our 2026 Outlook, one thing we had in mind was surfing the AI wave, not necessarily through immediate productivity gains or direct AI corporate profits, but through the massive infrastructure buildout it required. As we noted then, this is a big one—something massive is happening in the economy. Large tech companies are driving a historic wave of capital expenditures to support AI, especially those that provide large-scale cloud compute capacity and operate hyperscale-level data centers.
As it turns out, the wave is even bigger than we thought it would be.
The big tech firms recently reported earnings, and they’re ramping up capex to even higher levels. When we wrote our 2026 Outlook, we estimated that these firms would spend a total of $515B on capex in 2026, up from almost $400B in 2025. That amounts to about 1.6% of GDP, which is staggering.
The most recent updates take the 2026 capex estimate to a whopping $674B, which is about 2.2% of GDP (2027 is expected to be similar). That is over 4x the level of capex in 2023 (0.5% of GDP) and 7x the size of where it was in 2019 (0.3%).
Expected 2026 AI capex is about the size of the US railroad buildout, 5x the interstate highway buildout, and 10x the cost of even the moon landing! Yes, it’s fair to call the collective AI spending a “moonshot” effort at ramping up a transformative technology. Note that this compares just 2026 capex to the entire level of capex for these other projects across multiple years.
But Investors Are Worried
Sentiment toward all this capex spending has clearly turned a corner (for now), and the contrast to last year is striking. Last year, investors seemed thrilled about all the capex spending, but the reaction has been different during earnings. Since the end of January through February 9, a period when several tech giants were reporting earnings, the S&P 500 gained about 0.4%, but that’s come despite pullbacks across big tech.
One risk here is quite obvious: These tech companies are moving from an asset-lite model, where they had enormous amounts of free cash flow, to an asset-heavy model that involves directing the cash toward capex. Debt is also becoming a larger part of the story as capex plans balloon.
And it doesn’t look like the spending is stopping, although future paths can change. But as a baseline, JP Morgan projects another $300B of AI and data center-related deals EVERY YEAR FOR THE NEXT FIVE YEARS.
One Company’s Spending Is Another Company’s Revenue (and Profits)
In our Outlook, we wrote:
Private sector investment is a source of corporate profit growth. Since profits are the main driver for stock prices, the key question is whether this level of investment spending will continue. The short answer seems to be yes, and it looks like early innings on that front.
If anything, we underestimated the level of capex spending in 2026, which means it’s going to be an even bigger boost for aggregate profit growth this year. Don’t be surprised if earnings expectations continue to ratchet higher as we move forward.
While it may look like investors are skeptical of these enormous capex plans, as reflected in stock prices for these companies during earnings, it doesn’t look like the companies are going to take their foot off the gas. They’re in a bind—each one sees an existential need to “win” the AI race, and so they’re incentivized to ramp up investment. If one company starts down that path, others feel the need to join the race and go all-in, which is why Google co-founder Larry Page has said, “I’m willing to go bankrupt rather than lose this race.” In short, don’t expect to see any unilateral disarmament. The opposite looks to be the case—we’re in a capex arms race.
Bigger picture, we are in a capex cycle with some strong parallels to those in the past, including the railroad and internet boom. The dynamics are similar: The promise of new technology pushes firms to make massive investments. Investors like that, and stock prices soar, facilitating even more investment. But ultimately, demand fails to keep up and there’s excess supply, although that ultimately benefited society, whether it was railroads, high-speed internet, new housing, or cheap oil, to look at some past major capex cycles. Overcapacity eventually leads to lower stock prices and lower valuations, and investment spending reverses. The dynamic is exacerbated when debt enters the picture, as the unwind becomes uglier.
However, we believe the length of the cycle (only a few years old), technology acceleration, and relatively low current debt levels suggest we’re not in the latter part of the cycle. In fact, demand for AI continues to rise, and GPU availability is falling across the board.
There will very likely be a negative part to this cycle at some point, but we don’t think it’s a 2026 story, or even necessarily 2027. For now, we believe we can ride the AI boom, but don’t believe it’s time to chase the AI theme with concentrated positioning—better to tilt in that direction for participation within a broadly diversified portfolio that includes exposure to other areas of the market (like industrials), and even international stocks, all of which could be the ultimate beneficiaries of all this spending.
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