Market Experiences An AI-Capex Turning Point, With Tipping Point To Follow

Led by sharp declines last Thursday in the stock prices of Alphabet and Tesla, the Magnificent Seven lost approximately $890 billion in market value. The Wall Street Journal reported that these declines stemmed from a shift in investor perspective, from a focus on earnings to a focus on free cash flow. Free cash flows for Alphabet and Tesla are now negative, in large part due to these companies’ massive capital expenditures. Investors need to put into perspective how stock market declines, free cash flow patterns, and capex fit together, both conceptually and historically. The big picture involves market cycle dynamics, with turning points and tipping points. The events of last week look like very much a turning point; and looming ahead is a potential major tipping point. My goal for this post is to connect the dots between stock market declines, free cash flows, and capex. To do so, I describe highlights from last week’s Wall Street Journal coverage , which I then relate my prior posts on these topics. What The Wall Street Journal Reported The Wall Street Journal reported that on Thursday, July 23, Alphabet’s stock declined by 7% and Tesla’s stock declined by 15%. These declines, both record-setting one day drops for these respective companies, spread to other major technology stocks. According to the article, the main driver of the declines was “free cash flow—which turned negative at both.” In this respect, investors had “dialed in to the implications of ramped-up capital spending.” The Journal explains that free cash flow is essentially “the money companies have remaining from cash receipts” during the reporting period “after incurring cash expenses and making big-ticket investments.” In particular, the Journal states that free cash flow is “how much cash is available for things that investors like, including dividends and share repurchases.” MORE FOR YOU The Journal also explains that free cash flow is different from net earnings, in that the latter “spreads the cost of major investments over several years through depreciation and amortization.” Typically, investors pay more attention to earnings than to free cash flow. However, apparently last week was different. Right and Wrong Ways To Measure Free Cash Flow The shift in focus by investors from earnings to free cash flow marks a turning point in market perceptions. While this might be the case, there is little if any evidence that investors actually have a good und...