Big Tech’s AI spending spree (AMZN/GOOGL) and the rising cost of capital determined by Wednesday/Friday’s data
Big Tech’s AI spending spree by giants like Amazon and Alphabet (Google) faces headwinds from this week's economic data, which signals a rising cost of capital.
AI Capex Surge Led by AMZN and GOOGL
Amazon is projecting capital expenditures up to $200 billion in 2026, with the bulk directed toward AWS AI infrastructure to meet exploding demand for cloud-based AI services. Alphabet, Google's parent, anticipates $175-185 billion, more than doubling last year's outlay on data centers, custom chips, and advanced models like Gemini.
Alongside Meta and Microsoft, these leaders plan a collective $650 billion AI push this year—outstripping India's national budget—wagering on supremacy in generative AI, robotics, and enterprise tools. Amazon CEO Andy Jassy highlighted "strong long-term return on invested capital" from these bets on chips, cloud, and AI innovation.
Wednesday's Jobs Report Fuels Yield Rally
The US Nonfarm Payrolls for January, released on Wednesday February 11, showed 130,000 jobs added—nearly double the 70,000 forecast—with unemployment at 4.3% and wages up 3.7% year-over-year. This robust labor market data dimmed hopes for imminent Fed rate cuts, driving Treasury yields sharply higher.
The 10-year yield approached 4.3%, while 2-year notes hit near 4.7%, as traders recalibrated for a "higher-for-longer" rate environment. Such strength often foreshadows stickier inflation, piling pressure on rate-sensitive growth stocks like Big Tech names.
Friday's Inflation Data Looms Large
January's Consumer Price Index (CPI), slated for Friday February 13 at 8:30 AM ET, eyes 2.7% headline and core rates—still above the Fed's 2% goal. Persistent shelter inflation around 3.2% year-over-year and services pricing keep upward risks alive.
Any upside surprise could echo historical moves, lifting yields another 5-10 basis points and inflating discount rates on distant AI cash flows. Producer Price Index (PPI) context, often paired in analysis, underscores wholesale cost pressures.
Investor Squeeze on Tech Stocks
Post-earnings, Amazon shares tumbled 9% on capex jitters, while Alphabet held flatter amid AI revenue optimism but capex scrutiny. Elevated yields erode high-valuation AI darlings by hiking the cost of equity, much like kryptonite to their multiples.
These firms' Weighted Average Cost of Capital (WACC) now hovers at 9-10%, versus 7-8% in low-rate times, testing returns on $650 billion-plus investments. Skeptics probe whether AI hype delivers monetization fast enough to offset the frenzy.
Balancing Boom and Bubble Risks
NFP resilience supports consumer spending, a tailwind for AWS and Google Cloud, yet inflation persistence strips away cheap debt buffers. President Trump's expansionary policies could amplify yields through added fiscal stimulus.
Analysts caution the capex magnitude "far exceeds consensus," flirting with overbuild if AI ramps lag. Still, hyperscalers insist it's table stakes for leading large language models and AI services.
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