NYU Stern School of Business professor Aswath Damodaran has published a market analysis suggesting that the massive capital expenditures required for artificial intelligence are fundamentally altering the financial structure of major technology companies. Damodaran, known as "The Dean of Valuation," argues that while soaring headline earnings are keeping stock indexes buoyant, the underlying reality is a shift toward heavy infrastructure spending.
According to the report, capital spending at U.S. public companies reached $507.4 billion in the second quarter, a 35.66% increase from the previous year. Technology companies led this surge, with capital expenditures rising 79.88%, followed by a 62.01% increase in the communication services sector.
Damodaran highlights an asymmetric accounting loop affecting "hyperscaler" builders—specifically Alphabet Inc., Meta Platforms Inc., Microsoft Corp., and Amazon.com Inc. These companies capitalize outlays directly onto their balance sheets. While longer amortization schedules are reducing the immediate hit to earnings, the professor notes that capital expenditures represent a direct, upfront cash deduction. Consequently, these builders are becoming asset-heavy companies that must now clear a higher cost-of-capital hurdle to avoid market repricing.
In contrast, suppliers of AI infrastructure, such as NVIDIA Corporation, Taiwan Semiconductor Manufacturing Company, and Broadcom, are seeing their spending become revenue. Damodaran observes that while aggregate cash burn among builders dwarfs net cash generation by suppliers, the rich margins of these suppliers are carrying the profit through to the bottom line.
The analysis also points to a record-low shareholder return environment. S&P 500 companies returned approximately 63% of earnings to shareholders in the past 12 months, the lowest level since 2004. During this period, dividends rose about 5% and gross buybacks increased by about 9%, trailing far behind a 49% surge in net income.
Regarding investment strategies, Damodaran outlines four potential paths for investors:
- The Maximum Bull: A strategy of going long on AI architecture builders and suppliers while shorting vulnerable legacy industries, with a strict prohibition on leverage.
- The Passive Realist: Maintaining broad equity exposure through broad ETFs like the State Street SPDR S&P 500 ETF, assuming aggregate corporate AI investments will generate returns.
- The Defensive Skeptic: Pivoting toward insulated niches such as food processing and leisure, or allocating into regulatory-shielded regions like Europe or labor-competitive Asia, while preserving liquidity in short-term Treasuries yielding above 4%.
- The Direct Contrarian: A strategy expecting a market reversal, involving liquidating equities into cash or shorting overextended AI darlings while buying disrupted incumbents.
