A historic moment for the US AI industry since the arrival of ChatGPT has arrived. Microsoft has nearly become the first major US tech company to officially lower its AI capital expenditure (CAPEX) forecast, a move that was immediately rewarded by the stock market. It is likely not the last to do so.
As previously discussed, at least one of the major Cloud Service Providers (CSPs) was expected to miss its CAPEX targets. Investor sentiment indicated that the market anticipated a high probability of capital spending cuts from Microsoft, a company run by professional managers. The truth is now clear: CAPEX has been revised down from $190 billion to $175 billion. This decision was announced even after the company reported a quarter that beat expectations across the board, leading to a significant surge in its share price.
Another major player, Meta Platforms, founded by Mark Zuckerberg, has not been as stubborn as some might think. Its capital expenditure plan has only been adjusted by raising the lower end of the range from $125 billion to $130 billion. This is effectively a pause in increases under capital market pressure. The move signals that Zuckerberg is focused on return on investment and company valuation; Meta Platforms is not Oracle. However, the market is still not satisfied. With Meta Platforms' free cash flow (FCF) on the verge of turning negative, and Microsoft—a top performer—still choosing to cut its CAPEX, the market expects Meta Platforms to implement even deeper cuts. It is highly probable that capital will continue to rotate out of Meta Platforms and into companies with more stable FCF, such as Microsoft, Apple, or even Coca-Cola. This trend will likely persist until Meta Platforms follows Microsoft's lead: delivering a FCF surprise and further restraining CAPEX.
For the broader US stock market, the "Coding Bull" phase of the AI agent honeymoon is over. The market capitalisation of tech stocks has already been inflated. Without a credible new large-scale application for AI to drive incremental demand, upward revisions to AI CAPEX are no longer seen by Wall Street as shrewd investments, but rather as a form of gambling that should be controlled. The bear market for the Philadelphia Semiconductor Index is deepening. From a FCF and capital return perspective, Microsoft has exceeded expectations, while Alphabet and Meta Platforms have both fallen short. Amazon.com recently faced a cold reception for its bond issuance. Simultaneously, oil prices and US bond yields continue to rise, all of which paints a concerning picture for the Nasdaq.
On a positive note, there is a clear trend of sustained net capital inflows into Chinese tech stocks. As the saying goes, "If youth will not stay, it's better to be a good uncle." Given that the US's silicon-based upstream growth is facing downward pressure, it is more prudent to focus on China's silicon-based downstream and carbon-based sectors, such as the Hang Seng Tech Index, which are poised for marginal improvements in growth. Since the Nasdaq's FCF profile has deteriorated, it makes more sense to invest in China's "sauce aroma technology" (referring to premium consumer staples like Kweichow Moutai), which boasts superior business models and FCF without the burden of continuous high-stakes AI CAPEX on the table.
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