Jefferies' Head of Global Equity Strategy Chris Wood warns that the AI boom is entering a more unforgiving phase as investors question whether Big Tech's unprecedented spending will generate adequate returns. According to The Economic Times, Wood stated that markets are now responding negatively to increases in capital expenditure, a warning signal for hyperscalers that have committed vast sums to AI infrastructure. Alphabet was punished after turning free cash flow negative in the second quarter of 2026 for the first time since its IPO in 2004, while Meta shares fell as its free cash flow plunged 91% to $784 million in the second quarter from $8.5 billion in the same period last year. The company also raised the lower end of its 2026 capex guidance to $130-$145 billion from $125-$145 billion, demonstrating the scale of AI infrastructure commitments. Wood's long-standing view is that the 'hyperscalers will end up blowing a lot of money on their capex binge' and that AI could resemble the airline industry more than the winner-takes-all economics of the internet era.
Microsoft provided the contrast to the negative reactions with its shares gaining 8% after it maintained calendar year 2026 capex guidance at approximately $175 billion. As reported by The Economic Times, that figure was adjusted from an earlier $190 billion estimate because of accounting changes related to the useful life of assets and the movement of finance leases to operating leases, which are not included in capex. The divergent market reactions suggest investors are becoming more selective about AI spending, with companies may still be able to commit billions of dollars to infrastructure, but the market increasingly wants evidence that this spending can support revenue and cash-flow growth. Wood noted that results announced so far have not signalled a decline in hyperscaler capex, which is why analysts have yet to cut earnings forecasts for companies such as memory chip producers, but the negative response to higher spending represents an important shift in market behaviour.
Veteran macro investor Jordi Visser believes the easy money in artificial intelligence has come to an end. According to reports from Bloomberg, Visser, who runs AI research at 22V Research and has over 30 years of market experience, stated on a podcast that "The AI trade's over. The ability of getting seven, eight times your money in that is over." He expects returns to shrink from the previous seven to eight times returns to closer to 30% annually, still good but no longer a windfall. The shift is attributed to increasing competition as cheap open-source models catch up, preventing any single company from maintaining a long-term advantage. Wall Street is already split on AI chips as a result, with big investors having little spare money to put to work. Wood's warning is that the companies spending the most may not necessarily emerge as the biggest winners and the market has started demanding proof before financing the next phase of the capex boom.
Recent company filings reveal significant cash flow challenges among major AI investors. As reported by Bloomberg, Google spent more cash last quarter than it collected, marking the first time this has occurred since the company listed in 2004. Microsoft's spare cash fell 23% despite sales rising 18% and Azure cloud business growing 43%. Meta's cash position dropped dramatically from $8.5 billion to $784 million, with the company borrowing $24.91 billion to fund $31.08 billion in new capacity over three months. The continuing unwind in semiconductor stocks has already pushed some companies close to their 200-day moving averages, with Wood noting that the correction could be limited if it merely represents a technical flushing out of leveraged positions accumulated by momentum traders, but the bigger risk is that the violent selloff is anticipating an eventual slowdown in hyperscaler spending.
Korea's AI trade has suffered a brutal reversal with the Kospi falling 40% from its all-time high of 9,385.6 reached on June 19. As reported by The Economic Times, foreign investors have sold a net $116 billion of Korean equities so far this year across cash and futures markets, with technology stocks accounting for $104 billion of that selling. Assets in domestic leveraged exchange-traded funds tracking Korean equities have collapsed to $17 billion, down 66% from their $50 billion peak on June 22, while retail margin-loan balances remain elevated at $22.8 billion. The Korea's neutral weighting in the MSCI AC Asia Pacific ex-Japan Index has fallen to 17.5% from a peak of 24.6% in late June, highlighting how rapidly index exposure can reverse when investors question AI trade assumptions. However, dedicated domestic ETFs tracking Korean equities have received net creations of $48 billion this year, providing some counterweight to the foreign exodus.
Wood sees China emerging as the AI winner as the critical question shifts from whether AI demand will grow to who will capture the economics of that growth. According to The Economic Times, China's rapidly growing semiconductor industry provides a striking counterpoint to the selloff elsewhere. CXMT, the country's leading DRAM manufacturer, surged 500% after listing, with its market capitalisation reaching $523 billion, briefly making it the most valuable company listed in mainland China. CXMT's valuation exceeded Industrial and Commercial Bank of China's $410 billion market capitalisation and was just below Hong Kong-listed Tencent's $547 billion. The extraordinary debut came during a week in which global memory stocks remained under intense pressure, demonstrating that investor appetite for AI has not disappeared but is rotating towards companies offering lower starting valuations or greater exposure to China's domestic technology ecosystem.
