Big tech approaches ‘red flag’ moment: AI capex is so great hyperscalers could go cash-flow negative, Evercore warns

Big tech companies’ capital expenditure (capex) on AI has become so large that it is at risk of making some companies go cash-flow negative, a “red flag” for stock valuations, according to analysts at Evercore ISI.

Nervousness about the effect of AI on the stock market has led to a high level of volatility in the S&P 500 year-to-date, as investors alternately bid up tech stocks based on positive quarterly earnings reports and then sell them off on speculation about AI’s ability to destroy their underlying businesses. 

Meta is expected to spend $55 billion on AI capex this year, Alphabet said it would double capex to $180 billion, and Amazon guided a 50% increase to $200 billion, according to Evercore’s Julian Emanuel and his colleagues. (Wells Fargo previously estimated AI capex across the sector would be up 24% for 2026, or around $660 billion, according to the Financial Times.)

“Increasing capex is forcing companies to spend significantly more of their cash flows, and raise debt, to continue investing for the future. Debt-driven expansion has sent jitters through the market, but signs of AI systemic risks still remain largely absent. Broadly, leverage continues to remain healthy,” Emanuel and his team advised clients.

However, they said, “debt has been rising, highlighted most recently by GOOGL (Alphabet) raising $30 billion-plus last week. That has meant that on aggregate, hyperscalers now hold more debt than cash.” Nonetheless, corporate debt levels remain below the median of the S&P 500 companies, he said.

It’s free cash flow (FCF) that is the looming problem, Emmanuel et al. wrote. Based on current trends, the big AI hyperscalers are spending so much of their free cash flow on AI capex that it could be about to go negative:

“One ‘yellow flag’ though has now been triggered. While FCF generation remains positive on aggregate, ongoing spending to build GenAI’s ‘railroad tracks’ is becoming a key issue. Hyperscalers’ 12-month forward FCF has now plummeted below the ‘yellow flag’ 2022 cycle lows. … Amazon’s $200 billion in capex for 2026 was higher than feared—and means 2026 is likely a negative FCF year for Amazon. FCF turning negative for the hyperscalers on aggregate would signal a major ‘red flag,’” they wrote in a note seen by Fortune.

“More ‘yellow’ and ‘red’ flags being triggered coinciding with ongoing AI gains would indicate sentiment is driving returns—raising the likelihood of a bubble,” they said.

For now, Evercore is still predicting the S&P 500 will hit 7,750 by year-end.

Two other banks, Bank of America and RBC Capital Markets, also expressed worries about AI capex recently.

BofA’s regular survey of investment fund managers found that the percentage of chief investment officers telling their CEOs they needed to improve the cash position on their balance sheets as opposed to increasing capex rose from 26% to 35% in February. “Capex too hot right now,” Michael Hartnett and his colleagues said in a note seen by Fortune.

At RBC, Lori Calvasina and her team wrote, “We have viewed risk of AI overspend/overhype as a risk to be vigilant on, especially since valuations and capex spend for the biggest market cap names have been near past peaks. Until recently, concerns that the AI trade is overdone appeared to be fueling healthy rotation within the U.S. equity market and risk management, but that appears to have given way to outright derisking in February.”

Nonetheless, she told clients, “We continue to lean more towards the idea that the AI trade got overdone as opposed to being a bubble.”

Here’s a snapshot of the markets this morning:

• S&P 500 futures were down 0.39% this morning. The index closed flat at 6,836.17 in its last session. 
• STOXX Europe 600 was flat in early trading. 
• The U.K.’s FTSE 100 was up 0.14% in early trading. 
• Japan’s Nikkei 225 was down 0.42%. 
• China’s CSI 300 is closed for Lunar New Year.
• The South Korea KOSPI is closed for Lunar New Year.
• India’s NIFTY 50 was up 0.17%.
• Bitcoin declined to $67.8K.

This story was originally featured on Fortune.com