Oil prices reverse early losses as Iran supply fears overshadow Russia measures
We have read a few articles expressing concern that the free cash flow for many of the Magnificent (Mag) 7 companies that are heavily involved in AI development and/or data center construction has leveled off. Furthermore, the hyperscalers, including Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT), Google (NASDAQ:GOOGL), and Oracle (NYSE:ORCL), issued over $120 billion in debt last year. Additionally, Google just issued $32 billion of debt in 2026. The recent financial concerns are blamed for the Mag 7s poor relative performance recently. The Mag 7 narrative is shifting from cash generation to capital consumption.
The graphs below help us better assess the new narrative driving the AI-intensive Mag 7 companies. The top graph shows the aggregate free cash flows and capital expenditures for Google, Meta (NASDAQ:META), Nvidia (NASDAQ:NVDA), Microsoft, and Amazon. Free cash flow has stopped growing, while capital expenditures continue to rise. Moreover, the difference between the two is now negative. While the current dynamics have changed, we should expect these companies to invest heavily in AI. And they are. As we see, free cash flow is no longer enough to fully fund capital expenditures.
As a result, debt is supplementing free cash flow. Oracle is making headlines about excessive debt, and concerns are spreading, rightly or wrongly, across the industry. Oracle has a debt-to-equity ratio of 4.40 and has spent $21 billion in Cap Ex last year, resulting in negative cash flow. However, Oracle’s debt burden differs significantly from that of the Mag 7 stocks, as shown in the second graph.
Bottom line: expect AI companies to increase the use of debt to fund AI Cap Ex. But bear in mind, this investment has significant profit potential. Furthermore, the Mag 7 companies have very low debt-to-equity ratios, allowing them ample room to fund AI beyond cash flow.
The Week Ahead and PCE Prices and GDP
NVIDIA earnings on Wednesday may drive the market this week. NVIDIA has been range-bound, while many other tech stocks have been under pressure. Will strong earnings from Nvidia force the market to rotate back toward AI stocks and growth stocks over value?
The economic calendar is quiet, with PPI as the only significant data point. There are plenty of Fed speakers this week, of which we expect to hear hawkish and dovish views. Given the wide range of opinions, we doubt the market will make much of any one speech.
The US economy grew well below the expected 3.0% rate at 1.4%. As shown below, consumer spending and business investment in AI were strong, but the government shutdown negatively impacted growth. PCE prices, both core PCE and headline PCE, were 0.1% higher than estimates. While that is concerning, the data was for December. As we have noted, Truflation shows a sharp decline in inflation starting in 2026. Per their estimate, real-time PCE is currently at 1.55%, almost half of the just-reported December PCE annual rate.
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