Alphabet and Tesla shares took a hit last week after quarterly results showed rising capital expenditures and declining free cash flow. Microsoft, Amazon, Apple and Meta Platforms report this week, and credit default swaps on many of these companies have widened notably. MarketWatch columnist Michael Kramer argues the risk could extend to the semiconductor businesses supplying their AI hardware.
Investors soured on declining free cash flow and rising capital expenditures at Alphabet and Tesla last week, and both stocks took a hit after the companies reported. Microsoft, Amazon, Apple and Meta Platforms report earnings this week, and Wall Street will be looking closely at free cash flow, capital expenditures and growth.
Alphabet reported Q2 2026 free cash flow of negative $5.9 billion, compared with positive $5.3 billion a year ago, and its capital expenditures jumped to $44.9 billion from $22.5 billion. After those results and its announcement that spending would increase, Alphabet's stock fell sharply and its CDS spread widened.
Capital spending forecasts climb, cash flow forecasts fall
Consensus estimates put Apple's capital expenditures over the next 12 months at around $13.4 billion, the one company that has kept capital spending relatively restrained. Tesla's spending is expected to reach close to $22 billion, still modest compared with Meta at $142 billion, Microsoft at nearly $180 billion, Amazon at $216 billion and Alphabet at almost $252 billion.
For the quarter now being reported, analysts forecast Amazon's capital expenditures rising to $48.2 billion from $32.2 billion, Microsoft's to $35.1 billion from $17.8 billion and Meta's to $33.7 billion from $17.6 billion. Free cash flow is expected to move the other way, with Microsoft at $17.4 billion, down from $25.6 billion, Meta at negative $178.4 million against positive $9 billion, and Amazon declining to negative $3.8 billion from positive $332 million. Apple is again the exception, with free cash flow expected to rise to $30.1 billion from $24.4 billion.
Credit investors watch a different set of metrics
As the spending continues, many of these companies have increasingly tapped the capital markets to finance their AI infrastructure buildouts. Kramer reads the widening credit default swaps as a sign that credit investors may be demanding more protection as debt issuance increases and capital spending accelerates, or that they are reassessing the credit risk attached to these increasingly capital-intensive business models. Either reading would mark a departure from how the bond markets have treated them.
Chipmakers sit at the end of the chain
Because semiconductor companies depend on hyperscaler spending, a slowdown driven by higher financing costs or weaker free cash flow could eventually feed through to semiconductor demand. According to MarketWatch, the widening CDS spreads for Nvidia, Broadcom and AMD are "particularly surprising because these businesses continue to generate strong and rising free cash flow".
If capital spending keeps accelerating while free cash flow deteriorates, Kramer argues, it could become increasingly difficult for these companies to sustain the premium valuations they have historically enjoyed.
Source: MarketWatch
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