The S&P 500 trades at 22 times projected 2026 earnings but 32 times projected free cash flow, a gap Barron’s Streetwise host Jack Hough calls extraordinarily expensive. The distortion stems from AI capex that flatters reported profits while draining cash, leaving the index with a thin margin for disappointment.
The number that should unsettle anyone holding the S&P 500 is not its 22 times earnings multiple. On Barron’s Streetwise, host Jack Hough pointed to a far steeper figure. According to 24/7 Wall St., the index trades at 32 times projected free cash flow, a level Hough described as extraordinarily expensive. The index is up 9.22% year to date.
Hough’s explanation for the gap turns on how AI spending is booked. As he described it, when a hyperscaler spends billions on GPUs and data centers, that capex depreciates over years, so only a sliver hits the income statement each quarter. So the whole ecosystem’s reported earnings look terrific, while the cash actually leaving the building tells a different story.
Where the cash actually goes
The scale shows up in the numbers. Alphabet posted FY2025 free cash flow of $73.3 billion, up just 0.7% year over year, even as capex jumped 74% to $91.4 billion. In Q1 2026 the pressure grew: free cash flow collapsed 46.63% to $10.12 billion while capex more than doubled to $35.67 billion. Sundar Pichai then guided 2026 capex to $175 to $185 billion.
Meta is running the same experiment. It reported full-year 2025 free cash flow of $43.6 billion, down 19.39%, even though revenue grew 22.17%. Meta shares are down 8.6% year to date, while Alphabet is up 15%.
The rotation is already crowded
Hough’s tactical suggestion was less big tech and more hard hat and value stocks. Dell reported quarterly revenue growth of 87.5% with AI-optimized server revenue of $16.13 billion, and its stock is up 217% year to date. Even Caterpillar is up 62% YTD, lifting its trailing valuation to 48 times earnings.
For long-term investors, Hough’s advice was plainer. According to 24/7 Wall St.: “My recommendation is to hurry up and do nothing” for long-term investors. When reported earnings are flattered by the capex of others, the margin for disappointment is thinner than the P/E ratio suggests.
Source: 24/7 Wall St.
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