*AI spend fears return and hyperscaler equities are pummeled
For over 18 months I have warned in my Diary, in our Comments Section and in our 200+ issues of “More Tales” that hyperscalers’ cash flow was disappearing and that it was unclear whether an adequate return on invested capital would be forthcoming in the years ahead.
It was my growing concern that a rerating of the Mag 7 was likely as the hyperscalers moved from capital light to capital intensive:
Google reported negative free cash flow of $5.9 billion in Q2, driven by massive capital expenditures on AI infrastructure. This marks the first time in the company's public history that its quarterly free cash flow turned negative. $GOOGLhttps://t.co/0Syh0eV2N7pic.twitter.com/v1r7DoOvBj
We have also been concerned about the ticking debt bomb of $1.65 trillion of off balance sheet financing that is at the heart of the AI capital spending super cycle. As well, practical concerns of the remarkably large AI buildout were being ignored:
Wrong. There IS a real chance of a pause. Not tomorrow, but conceivably in the next couple years. There’s *already* an enormous backlash, and palpable fear, not to mention a metric shit ton of litigation (that could lead to injunctions).
Despite protestation near (on TheStreet Pro) and afar (in the business media), Mag 7 equities began to underperform in late 2025. That underperformance has recently accelerated and yesterday’s performance represented the worst in the last five years (-4.80%):
“Our Mag7 basket finished -4.80%, the biggest one-day selloff in the last 5 years” – Goldman
Doug Kass is a world-renowned hedge fund manager with decades of experience and success navigating through some of the most turbulent periods in market history. He is known for his time-tested analytical skills and ability to look past the current noise and herd mentality.
On TheStreet Pro, Kass provides frequent market commentary and investing ideas for active investors throughout each trading day in Doug’s Daily Diary. He also serves as president of Seabreeze Partners Management Inc. Previously, he served as a senior manager at Omega Advisors, a $6 billion investment partnership. He co-authored a book with Ralph Nader and the Center for the Study of Responsive Law called “Citibank: The Ralph Nader Report” and can be found as a guest host on CNBC's "Squawk Box."
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