October 2026 Monthly Investment Memo

When AI Ambition Meets the Cost of Capital

By Francie Chen | October 31, 2026

This month’s earnings reports raised an important question: how long can large technology companies keep spending on AI before they need to show stronger investment returns?

Free cash flow is already under pressure. Alphabet spent $51.4 billion on capital investment this quarter, more than its $42.3 billion in operating cash flow. Meta reported negative free cash flow of $2.1 billion. Amazon’s free cash flow over the past twelve months fell to negative $42.4 billion as infrastructure spending increased. These figures cover different periods, but they show how investment spending is putting pressure on the cash these businesses generate.

The Hyperscalers’ Dilemma

I see the AI investment race as a prisoner’s dilemma.

Google, Meta, and Amazon were winners of the internet economy. Now, AI could weaken the advantages that made their businesses successful. They need to invest to protect their existing businesses and find new sources of growth. If they slow down, competitors could move ahead.

Each company therefore has a reason to keep spending, even if the industry’s future returns remain uncertain.

AI is already generating revenue. Google and Amazon reported strong cloud growth, and Meta said AI helped increase advertising revenue. But are these gains enough to justify the growing investment? In my view, they are still far from enough.

I also watch the relationship between cloud providers and AI developers. A cloud provider may invest in an AI company that then uses the money to buy computing services from that same provider. In that case, cloud revenue growth alone does not show how strong demand is from independent customers. Eventually, customers must be willing to pay enough for the products and services to support the business.

Capital Markets Will Limit Spending

Today, these companies face a funding problem: to maintain their AI spending, they need to raise money from capital markets.

Greater reliance on borrowing could weigh on their stock prices and make further financing harder to secure. Eventually, market pressure could force them to slow their AI spending.

I think AI spending growth is likely to slow until at least one of two things happens:

Higher productivity across businesses: AI produces clear, lasting efficiency gains across entire companies, beyond helping individual employees or departments.
Profitable consumer products: Consumer AI products earn enough revenue to comfortably cover the cost of serving users. I believe this is harder to achieve than in the internet economy. Many internet businesses can serve additional customers at little extra cost, while AI services incur computing costs with every use.

Implications for U.S. Treasuries and Interest Rates

AI investment is driving a substantial part of current U.S. economic growth. If AI investment grows more slowly, there would be less competition for capital. This could ease upward pressure on long-term Treasury yields and cool the economy, reducing pressure on the Fed to raise rates.

But I do not expect a return to ultra-low interest rates.

Deglobalization is keeping a significant amount of China’s production capacity out of supply chains. Replacing that production capacity is costly, which I expect to make inflation harder to bring down.

At the same time, very high interest rates would make the U.S. government’s debt burden harder to sustain. This would put pressure on the Fed and the Treasury to take steps to prevent interest rates from spiraling higher.

Together, these forces lead me to expect the U.S. 10-year Treasury yield to stay mainly between 3% and 6% over the longer term. Yields could move outside this range for a time, but I think those moves would be difficult to sustain. This is an important part of my framework for investing in equities.

Europe and Canada

Like the United States, Europe and Canada face heavy fiscal burdens. In my view, both also face greater regulatory barriers to investment and growth. Europe faces the added challenge of high energy costs, while Canada faces uncertainty over its relationship with the United States.

These structural challenges keep me bearish on the euro and the Canadian dollar.