Four charts explain why AI giants are all faltering in the US stock market.

Over the past few months, the hyperscalers—large-scale cloud computing companies that have been the most responsive to the AI wave among American tech giants—have shifted from market leaders to laggards. This change has surprised many industry insiders, as many Wall Street analysts still expected these companies’ profit growth rates in 2026 to be higher than the average for publicly listed U.S. companies.

In response, Wells Fargo stock analyst Ohsung Kwon and his team published a report on Tuesday revealing several key findings that may explain why investor enthusiasm for AI giants is beginning to cool.

Kwon’s team focused on four major hyperscalers: Amazon, Meta, Alphabet, and Microsoft. Except for Alphabet, the stock prices of the other companies have generally come under pressure since October last year.

The report first notes that as these hyperscalers continue to invest heavily in building data centers, their previously substantial free cash flows have shrunk significantly. The free cash flow to total sales ratio, a measure of free cash flow profitability, has now essentially aligned with the overall level of the S&P 500 index.

Since most of their cash flows have been reinvested into AI development, these companies have started turning to debt markets for financing. Kwon and his team believe this trend is just beginning.

Recently, Wall Street has been focused on the cash flow prospects of these large-scale companies. UBS analysts also pointed out on Tuesday that their capital expenditures this year could reach $700 billion, nearly consuming all their operating cash flows.

This shift from reliance on cash flow to dependence on debt has raised investor concerns. Kwon and his team warn that although this transition is still in its early stages, the stocks of these companies are already feeling the pressure.

Such concerns are understandable—an increase in investment spending has begun to erode the high capital returns that these tech giants once boasted.

According to Wells Fargo estimates, the incremental capital return rate of hyperscalers has also fallen from excellent levels to levels comparable to the average of S&P 500 companies.

As companies like Amazon and Microsoft continue to exceed Wall Street expectations with increased spending plans, the funds available for investor returns between 2026 and 2027 may decrease. Alphabet, Google’s parent company, announced a $20 billion U.S. bond issuance on Monday and is also planning to issue foreign currency bonds, including a century-long bond denominated in pounds.

Furthermore, increased capital expenditure is forcing hyperscalers to cut back on capital returns to investors.

Some industry insiders have recently warned that a potential slowdown in buybacks this year could become a broader market headwind. Nomura Securities cross-asset strategist Charlie McElligott warned of this risk months ago.

Wells Fargo found that the “total shareholder return” of the “Big Seven” and other tech stocks—calculated as dividends plus stock buybacks as a percentage of sales—has fallen to its lowest level since the dot-com bubble.

Note: The blue line represents the total shareholder return of the Big Seven plus other tech stocks; the red line excludes these groups.

Until recently, investors appreciated this large-scale capital investment. However, since the Q4 earnings season began, enthusiasm appears to have cooled, with Microsoft and Amazon both experiencing weak stock performance after releasing their latest results.

Kwon stated that this roughly aligns with investor reactions to previous capital investment cycles. If history is any guide, this could mark the beginning of a prolonged period of underperformance.

“Markets have always disliked companies in the midst of investment cycles,” Kwon said.

The final risk to note is that, despite recent sell-offs in software stocks drawing attention, Kwon’s team points out that market concerns over OpenAI’s competitiveness are also weighing on the tech sector. OpenAI has close financial ties with hyperscalers like Oracle.

As for where investors should allocate their funds, Kwon indicated that their cyclical and defensive stock portfolios have not fully reflected the recent uptick in economic activity suggested by the PMI index. Given that global economic growth is expected to accelerate in 2026, Kwon’s team is optimistic about small-cap stocks, commodities, and semiconductor sectors.

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Source: Cailian Press