Last week on October 29, Alphabet had its worst day on record. Shares fell 12%, wiping out $500 billion of market value, after the company reported its second straight quarter of negative free cash flow.

Amazon fell about 7% the same week, Meta dropped 7% the week before, and the Nasdaq finished October down 5.3%, its worst month since March 2025.

Why?

For three years, investors cheered every increase in AI spending. Last week, for the first time ever, they punished it.

What happened in the markets this week?

šŸ—³ļø Democrats win control of Congress in the US midterms (Reuters)

  • What happened: Democrats won majorities in both the House and the Senate on November 3. US stock futures fell overnight and AI-linked stocks dropped across Asia. Markets then reversed on November 4, and it was reported to be the Dowā€™s best day after a midterm election in 44 years.
  • How it impacts investors: Trump keeps his veto so most analysts expect gridlock for the rest of his term. That usually means fewer big policy changes, and it could limit deficit spending, which may help keep bond yields in check. Analysts also flagged possible pressure on AI regulation and stalled crypto legislation.
  • Next steps: Browse Simply Wall Stā€™s Investing Ideas to see which sectors could be most affected by policy changes.

šŸŽ Apple posts record revenue but rising memory costs weigh on its outlook (Simply Wall St)

  • What happened: Appleā€™s fiscal Q4 revenue rose 12% to a record $114.5B, and iPhone revenue rose 17% to $57.6B. However, its gross margin forecast for the holiday quarter disappointed investors, partly because memory chip costs are expected to keep rising.
  • How it impacts investors: AI data centers are buying up memory chips, which is pushing up costs for consumer hardware makers like Apple. Even a company with Appleā€™s pricing power canā€™t fully pass those costs on to customers.
  • Next steps: Check Appleā€™s past performance to see how its margins compare with its history.

ā˜ļø Amazonā€™s AWS posts its fastest growth in nearly five years (GeekWire)

  • What happened: Amazon led a Big Tech rebound on Wednesday after its latest results showed AWS cloud revenue up 39% to $45.98B and a backlog of $578B. EPS was $1.89, below the $1.96 expected, and free cash flow over the past 12 months was negative $42.4B as Amazon spends heavily on AI.
  • How it impacts investors: Investors looked past the earnings miss and the cash burn because cloud demand is accelerating. For now, the market is willing to reward AI spending when growth is clearly showing up in revenue.
  • Next steps: Review Amazonā€™s valuation and growth forecasts on Simply Wall St.

šŸ¤– AMD and Palantir show the market is getting pickier about AI winners (StockTitan)

  • What happened: AMD reported record Q3 revenue of $13.4B with data center sales up 97%. Its shares rose about 5% after hours. Meanwhile, Palantirā€™s revenue rose 96% to $2.31B, yet the stock fell 1.65% because the value of new US commercial contracts grew only 11%.
  • How it impacts investors: Strong growth alone isnā€™t enough when expectations are already high. Investors are looking at forward indicators like new contracts and guidance, not just last quarterā€™s revenue.
  • Next steps: Compare AMDā€™s valuation and Palantirā€™s growth forecasts to see how each is priced against their growth.

šŸ”Œ Marvellā€™s US$115B deal for Lumentum sends both stocks lower (Tomā€™s Hardware)

  • What happened: Marvell agreed to buy the optical networking company Lumentum in an all-stock deal worth $115B. Marvell fell 13% on the day and Lumentum fell 19%. Marvellā€™s CEO said AI infrastructure is moving towards optical connectivity, which links chips and data centers using light instead of copper.
  • How it impacts investors: Usually the targetā€™s shares jump when a takeover is announced. Here both fell, which tells you investors are worried about dilution and about paying peak prices for AI assets. In an all-stock deal, Marvell shareholders are effectively paying with their own shares.
  • Next steps: Review Marvellā€™s valuation to see whether the sell-off has gone too far.

AI stocks are spending more than they earn

Last week was a bloodbath. Nearly all the Magnificent 7 fell heavily, and the entire tech market saw red across the board.

The big headline? AI spending.

Alphabet, Amazon, Meta and Microsoft plan to spend more than $740 billion on capex this year, mostly on data centers and chips.

That's more than their businesses bring in. Including Oracle, their combined capex was on track to overtake the cash their businesses generate around the third quarter of this year.

Free cash flow is what's left after that spending and last week's results showed it shrinking fast:

  • Alphabet: free cash flow of negative $9.1 billion, against the negative $3.5 billion analysts expected, with search growth slowing to 12%.
  • Amazon: AWS grew 39%, but free cash flow over 12 months swung from $14.8 billion to negative $42.4 billion.
  • Meta: its first negative free cash flow quarter since 2012, at negative $2.1 billion.
  • Oracle: $28.5 billion of capex vs. $19.3 billion of revenue last quarter. Shares are down about half over the past year.
  • Microsoft: the exception, with positive free cash flow of $18.6 billion. Shares held up far better than the rest.

Microsoft was the only one that came out looking better.

To be fair, Microsoft's result was partly timing. Its capex came in below plan because of delays from outside suppliers, not a decision to pull back, and the shares are still about 5% below their high.

Put simply, the market isn't rejecting AI. It's starting to price how much money each company needs to pursue it.

Companies and investors are reminded that growth isn't free

Not all growth costs the same, and the market has started pricing the difference instead of being ecstatic over further AI investments.

The chart below compares the big AI spenders with a group of slower-growing companies like Costco, Walmart and Coca-Cola.

To summarize:

  1. The AI spenders grow revenue about 21% a year, spend more than a third of their revenue on capex (over 100% at Oracle), and trade at an average of 20.7x forward earnings.
  2. The slow growers grow about 5%, spend under 5% of revenue on capex, and trade at an average of 29.6x.

In other words, investors are paying more for a quarter of the growth.

There are two ways to read these numbers.

One is that the market is pricing capital. A business that grows 5% while spending very little may be worth more per dollar of earnings than one that has to spend a third of its revenue to grow.

The other is that investors are paying a temporary premium for safety, which could fade once the nerves do.

Keep in mind the slow-grower group was chosen because it trades above the AI spenders, so it isn't every slow grower. And not everyone thinks the premium is deserved, as this Costco Narrative shows.

None of this makes negative free cash flow bad on its own. Heavy investment can pay off. The question that seems to plague the minds of investors nowā€¦ is whether the returns arrive.

And what's interesting is how all this spending impacts the bigger picture, not just in AI and tech, but across the broader market.

Here's what it looks like in the bigger picture

Here's a question: if all these big tech companies are spending more than they earn, where is the money coming from?

Debt.

Microsoft, Alphabet, Amazon, Meta and Oracle have raised $326 billion in debt this year, triple last year's amount. And itā€™s not just these big names, AI companies broadly have taken 82.7% of US venture funding so far this year.

And as we all know, money isn't unlimited (as much as we wish it would be).

This means, the money AI borrows comes from the same pool everyone else borrows from. That pulls it away from other businesses in three ways:

First, there's more competition to borrow. AI-related corporate bond issuance has reached a record $419 billion so far this year, nearly double 2025. Only $157 billion of that came from the big tech companies. The rest came from data center builders, riskier high-yield borrowers and others.

Second, money gets more expensive. Goldman has argued that AI investment and government borrowing are pushing up the cost of capital for everyone. The US 10-year Treasury yield hit 5.31% on October 1, its highest since 2007. It has since eased to 4.84% as nervous investors moved into bonds, but this is still well above the roughly 4.4% it sat at in April.

Third, attention moves. Startups outside AI share what's left of venture funding, and rounds under $100 million fell to 12.5% of deal value in the first half, from 33.1% last year. The same happens in the stock market. When most of the money chases a handful of giants, smaller and less exciting companies get overlooked.

That leaves two groups. Companies with heavy debt are hurt most if borrowing stays expensive. And strong businesses with little debt may have been left cheap for reasons that have nothing to do with how they're performing.

šŸ‘‰ Here's a community watchlist of that second group: Undervalued Quality Stocks (Non-AI).

What would tell you the flow for AI stocks is turning?

None of this says the spending is wrong. These companies may well earn a good return on it. But a few signals will show which way it's going and how well the spending yields results for both the companies and its investors.

  • Whether free cash flow follows the forecast. Going into this earnings season, analysts expected the big four's combined free cash flow to fall to about $70 billion this year and $60 billion next, about a quarter of the 2024 level, then rise to about $640 billion by 2030. That's nearly 3x anything they've produced before. Each quarter moves toward that curve or away from it.
  • How much of the spending is borrowed, and whether lenders start asking AI borrowers for higher interest rates.
  • The companies under the most pressure. Oracle is one. Smaller companies that rent out AI computing power are another. CoreWeave and Nebius fell after Microsoft's spending came in below plan, then another 11% and 9% on October 30.
  • Where money goes when investors get nervous. Last week it went into bonds and companies like Walmart, which rose 18% in October.

One more test is coming. Anthropic filed for its IPO on October 26. How investors receive it will say a lot about how much appetite is left for new AI money.

The Insight: How much AI stocks spend to grow matters as much as how fast they grow

For three years, the market mostly asked one question about AI: how fast can it grow? Last week, it started asking a second one: how much money does that growth need, and where does it come from?

That second question applies well beyond AI. Here are a few to ask about anything in your portfolio:

  • Is it funding its growth from its own cash or from borrowing? A company paying its own way can choose when to slow down. One relying on lenders depends on them staying willing.
  • Does it earn from the flow of money or compete with it? Banks earn when money moves. Borrowers pay more when it's scarce.
  • What does free cash flow need to look like for today's price to make sense? If the answer is a figure the company has never produced, the price is betting it will.

None of this says AI is a bubble or that it isn't. It says growth has a cost, and the market has started counting it.

Key events next week

Monday

  • šŸ‡ØšŸ‡³ Inflation Rate (YoY)
    • Forecast: 0.9%, Previous: 0.9%
    • Why it matters: Chinaā€™s inflation data is a key read on domestic demand. A steady result would suggest prices are stabilising, while a miss could renew concerns about the economy and increase expectations for more policy support.
  • Forecast: 0.9%, Previous: 0.9%
  • Why it matters: Chinaā€™s inflation data is a key read on domestic demand. A steady result would suggest prices are stabilising, while a miss could renew concerns about the economy and increase expectations for more policy support.

Tuesday

  • šŸ‡ØšŸ‡³ Balance of Trade
    • Forecast: US$135.0 billion, Previous: US$133.5 billion
    • Why it matters: Exports rose 36.3% YoY in the previous reading, so investors will watch whether that strength holds.
  • Forecast: US$135.0 billion, Previous: US$133.5 billion
  • Why it matters: Exports rose 36.3% YoY in the previous reading, so investors will watch whether that strength holds.
  • šŸ‡ŗšŸ‡ø Inflation Rate (YoY)
    • Forecast: 3.7%, Previous: 3.7%
    • Why it matters: Headline inflation is expected to stay well above the Federal Reserveā€™s 2% target, although core inflation is forecast to ease to 2.5%. The result will shape expectations for the Fedā€™s next interest rate move and could drive volatility across global markets.
  • Forecast: 3.7%, Previous: 3.7%
  • Why it matters: Headline inflation is expected to stay well above the Federal Reserveā€™s 2% target, although core inflation is forecast to ease to 2.5%. The result will shape expectations for the Fedā€™s next interest rate move and could drive volatility across global markets.

Thursday

  • šŸ‡¬šŸ‡§ GDP Growth Rate (QoQ)
    • Forecast: 0.4%, Previous: 0.5%
    • Why it matters: UK growth is expected to slow slightly in the third quarter. A weaker result could add pressure on the Bank of England to support the economy, while a stronger reading would suggest itā€™s holding up better than expected.
  • Forecast: 0.4%, Previous: 0.5%
  • Why it matters: UK growth is expected to slow slightly in the third quarter. A weaker result could add pressure on the Bank of England to support the economy, while a stronger reading would suggest itā€™s holding up better than expected.

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Mitch Lawler

Mitchell Lawler is a Senior Investment Editor at Simply Wall St, where he oversees Market Insights and the platformā€™s published editorial content. He also leads The Foxhole, a daily forum for contrarian investment ideas and constructive debate, drawing on nearly a decade of personal investing experience and more than five years in professional equity research and financial publishing.

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