Big Tech Has Til Year-End…or Else.

0:13Jessica Rabe:Today's show is sponsored by Tucrean. Looking to diversify your portfolio beyond stocks and bonds? Commodities are getting more and more attention as we enter 2026. Tucrean's agricultural ETFs offer a way to access the futures prices of essential crops. These funds may help manage inflation risk and add diversification to your portfolio. Ask your financial advisor or explore Tucrium ETFs on your own. Visit tucrium.com. That's T-E-U-C-R-I-U-M.com. Click the link in the show notes for more. All right, guys, welcome to an all new edition of What Did We Learn? On today's show, we are going to attempt to answer one of the biggest questions facing the stock market today.

1:04Jessica Rabe:How much more time will investors give to hyperscalers before they turn negative on all of this CapEx spending? I'm here with my friends, Nick Colas and Jessica Rabe, co-founders of Datatrek Research and the authors of Datatrek's morning briefing newsletter, which goes out daily to over 1 ,500 institutional and retail clients. Nick and Jessica also have their own YouTube channel, which you can find a link to in the description below. Welcome back, guys. Good to see you. Thank you.

1:36Josh Brown:Thank you. Thank you for having us back.

1:38Jessica Rabe:Oh, it's my pleasure. And I missed you guys. I know it's been a whirlwind start to the year, but we're back into our thing. And what a great topic because, Nick, you're making a pretty big pronouncement here. Big tech has 12 months to show that AI is worth it. Do you really think that's it? The clock is ticking. They have to prove it by the end of this year?

2:02Nick Colas:The clock's been ticking for a while, I think. If you look at the charts on these stocks, they're kind of flat for not just year to date, but for the last couple of months in the end of last year. So the clock actually started probably October, maybe even September of 25. And so I think I'm being a little bit generous, actually, about the year timeframe. Okay.

2:22Jessica Rabe:And just so we can frame why this matters so much before we get into the details, why is this so important? Is this going to be – will we see the referendum show up in the stock prices?

2:33Nick Colas:Yeah, it's the only referendum that matters, right? I mean, we'll ultimately decide. We all know the numbers. The big tech, the top 10 names are 35 plus percent of the S &P. Jessica, we'll go through this math. The three names we'll talk about today, Alphabet, Amazon, Meta, or 11 % of the S &P. These companies, these stocks kind of define large cap returns. So it's super important. Okay.

2:58Jessica Rabe:So you say big tech's business model has changed dramatically in a short period. Why don't you walk us through what you're telling clients about what's happening here?

3:07Nick Colas:Sure. The way I approached this was the way I looked at auto stocks back in the 1990s, which may sound weird, but auto stocks, auto companies are hugely capital intensive. And so the same kind of analysis you use on them, you can use on big tech now, which didn't used to be the case. So let's just start by looking at a couple of tables. The first one we've got is asset efficiency. Asset efficiency is revenues divided by property, plant, and equipment. It's an item on the income statement, revenues, and an item on the balance sheet, property, plants, and equipment. And it shows you how efficient a company is with its physical capital.

3:41Nick Colas:And the big tech companies used to be very efficient. So on average, Alphabet, Amazon, and Meta ran a ratio of 2.2 times back in 2023, meaning for every dollar of capital they had, they generated over$2 in revenues, which is a great ratio. But because they've been investing so heavily and will continue to invest so heavily this year, their asset efficiency is going to be down 42 % from 2023 in 2026. And a company like Alphabet will literally be half as efficient as it was just back in 2023. Other ones are 30 % or 40 % less efficient. So over the last three years, these companies have gone from being very capital efficient, kind of low cap X for every dollar of revenue, to not being very efficient.

4:25Nick Colas:And I'll give you sort of one kind of scary soundbite. Ford's revenue to PPE ratio is 5x, way higher than any of these companies. And Ford is a very capital-intensive business. But tech has become even more capital-intensive. That didn't used to be the case even three, four years ago. It is absolutely the case now. And the direction is very troubling.

4:47Jessica Rabe:Nobody would have been able to guess what you just said, that Ford is now more efficient in their revenue versus their capital expenditures? Their capital on their balance sheet, yeah. Yeah, I don't think anybody would guess that that's the case. Can we go back to that chart so I can ask you about one stock in particular? Sure. I know the one. Meta is cheating. Meta is committing to these long-term operating leases in exchange for someone else being willing to stand up these data centers, which is rational and I think shareholder friendly. I don't think anyone invests in Meta hoping to own piles of servers.

5:34Jessica Rabe:I get it. But are we measuring them using the right yardstick, given that they're doing so much of this, not only building but financing off balance sheet?

5:44Nick Colas:Yeah, and you've raised a great point. I'm glad you did because the numbers that we looked at on that table do not include capitalized leases. This is just the PP &E that Meta actually owns. So if you layer on that additional level of complexity, which I agree with you is smart financing, but also worrisome financing because it's ultimately debt, then you end up with an even more capital-intensive picture.

6:07Jessica Rabe:Okay. Do people ask you specifically about that one? And was that the one that you thought I would ask you about?

6:12Nick Colas:I thought you'd ask about it because Meta is the only one at less than one. So literally, Meta has less in revenues than it has CapEx, which, again, crazy. Yeah.

6:24Jessica Rabe:So how do they prove it? What would happen? Would the 2027 estimates start to trend back in the right direction, meaning the revenue is now catching up to all the spending that they've been doing? or what would a successful test look like? That's a great question. Let's go to the next slide, which is profitability.

6:47Nick Colas:So this is operating cash flow divided by revenues, how many dollars of cash flow they make for every dollar of revenue. And these companies, as we all know, very profitable. So running 34%, 36%, 39 % average operating profit margins over the last three years, going to decline this year on average to 34%. So for every dollar of revenue, 34 cents of operating cash flow. That is down five points from last year. The margin compression is across the board. And the way you prove any investment is worth it is to show incremental margins, to show better margins. So the bottom line is we've got to see profitability begin to increase in 27 because of these investments.

7:30Nick Colas:It's not just going to be revenue growth. It's going to be revenue growth that is profitable. And that's really the core of the issue. And again, I think we all know this, but it bears repeating, markets do not like it when margins compress. They worry about competitive advantage. They worry about profitability. They worry about those CapEx budgets. So seeing margins come down this year, not a great sign, which is just one more layer on the story of these CapEx numbers being scary in and of themselves, but also worrisome because profitability is declining.

7:59Jessica Rabe:now presumably the people making these spending uh these spending decisions at these companies they see the same numbers that you see they may be looking at them differently or thinking about them differently but the the dollar amounts are the dollar amounts they're doing this for a reason and i think what they would say is it's not like we have a choice it's some some people have called it a suicide pact, I wouldn't go that far. But you can't be in this group of companies that, and I guess we could throw Microsoft in here too, where you're going to spend materially less than your peers and be able to maintain your market share as all of these workloads move from traditional data centers to GPU stacks and AI data centers.

8:52Jessica Rabe:So I think that's the really important caveat that almost all of them have this plausible way of looking back and saying, well, what choice did we have? Do you see it the same way?

9:03Nick Colas:It's a very fair point. And let me just make one answer and then go to the last slide because I think it addresses a piece of your question. And I wrote this last night for clients. There is kind of a subtle agency problem going on between the managements of these companies and the shareholders. Because the shareholders can own a diversified portfolio of stocks and they don't actually care which company wins. What they want is the companies to allocate capital intelligently. The companies have a more existential problem, as you pointed out, because they can't be so far behind. They can't underinvest.

9:35Nick Colas:And this is the wrap on Apple right now, right? They're not investing enough in AI. Fine. They might just be saying, we don't know who the winners are, and they'll have to run through our platform anyway, so who cares? We're not going to spend that kind of money. But the rest of them kind of do. And let me go to the third slide that we have, because I think it addresses one question I think a lot of people were asking, which is how did these companies come up with the numbers that they are announcing as CapEx budgets for the year? And the simple answer is they figured out their operating cash flow for the year, and they said, we're doing all of it.

10:07Nick Colas:And that is different from the last three years. So, for example, back in 2023, these companies spent about 44 % of their operating cash flow on CapEx. Then it became 50. Then it became 70 last year. and this year, Alphabet is going to be 103%, Meta is 106%, and Amazon is spending way more than it's operating cash flow at 133%. So these companies basically said, okay, what's the maximum we can spend on this project? And so they went to their budget department and said, hey, we're going to make cash flow this year. Okay, we're going to make 200 billion. Okay, cool. We're spending all of it. That's the answer.

10:41Nick Colas:That's how they got to these numbers.

10:44Jessica Rabe:So you say, these companies don't really have a choice. They have to do it. Falling behind is not an option. In these sort of tech platform shifts, the companies that fall behind never come back. Yep. It is existential. But investors have a choice. And this is you. They don't have to wait around and see who wins the science fair. They can reallocate capital elsewhere. And I know we're going to get to that with Jessica now. But that's really the key thing is that investors could say, okay, maybe they're allocating wisely, maybe they're not. It's too soon to tell. I'm going to put this in the too hard pile and allocate somewhere else while the world figures the answer to that question out.

11:30Jessica Rabe:You're probably hearing that more and more from investors as the stock's flatline. Somebody is selling. Yeah.

11:37Nick Colas:Yeah. No, I think that's very well put. And look, I want to make one final point and then hand it over to Jessica because she's got a ton of good data on how this rotation is happening. But the bottom line is that investors are a little bit complicit in this bet because they're still awarding these companies huge valuations. And those valuations come from the assumption that they will find the next big thing and make a ton of money off of it. So it's not like these companies are trading at 10, 12, 15 times earnings because their CapEx process is broken. They're trading at 25 and 30 times because the market's giving them a vote of confidence.

12:09Nick Colas:So management can tell investors, you're paying us to do this. This is what our stock price implies. We have to do it. There's no not doing it. Yeah.

12:18Jessica Rabe:Okay. That's a really good point. Jessica, you say equity investors have a stark choice right now. Either stick with big tech as they shift their business model into this hyper investment mode or go elsewhere. When I look at the stock market on a daily basis, it looks like more and more people are choosing the go elsewhere option. But why don't you tell me what it looks like from your standpoint?

12:43Josh Brown:Sure. Yeah. Just building off what you're saying, the Stark choice is really they can stick with big tech as it goes through this huge shift in their business models, which is taking all their cash flows to execute and hitting margins. Or they can be good risk managers and park their capital elsewhere as the story plays out. And really, the macro backdrop is so good that they can justify taking incremental risk. And that's proven by the fact that last year's global trade shock didn't cause a global recession. So I have three points on this topic, and they're all anchored in the same index-based framework.

13:22Josh Brown:And that's that there's over 2 ,200 stocks in the MSCI All-Country World Index. So of course, that's just too many to evaluate individually. So investors think in terms of buckets. So you have the S &P 500 and then you have rest of world, which is the MSCI all country XUS index or the ETF symbol is ACWX. And my first point is that the S &P and ACWX's sector weightings are super different. And we have my first chart, if you could please pull it up. The S &P 500 overweights relative to ACWX are on the top and the underweights are on the bottom. So the takeaway here is that the S &P has a 17 percentage point overweight to tech, which is almost exactly equal to its combined underweights in financials and industrials.

14:13Josh Brown:And it's also meaningfully underweight materials. So the S &P is structurally skewed towards growth and innovation, whereas the MSCI All Country X US Index has a much stronger value and cyclical bias. Yes. The S &P and ACWX also differ in that the S &P is much more concentrated in its top 10 holdings, which we have in our next table. If you could please bring that up. Thank you. This is where the S &P and ACWX really diverge because, as you can see, over a third of the S &P is in its top 10 holdings. And in ACWX, that's just 14%. And let's pause on this.

14:53Jessica Rabe:This is incredible. So for those listening, not watching, the largest holding in the all country world index, XUS is 4.1%. And that's Taiwan Semi, which you might've guessed. The next largest holding is Samsung, which is already down to 1.6%. Then you have ASML 1.6. And then they get smaller from there. Tencent is the last one above 1%. every other international holding is less than 1 % of that index. Contrast that with the S &P where NVIDIA is 8, Apple is almost 7, Alphabet 5.5, Microsoft 5, Amazon 3.5, Broadcom 2.7, Meta 2.5. So that obviously, you're talking about a lot more stocks in that all country world index universe, of course, because it's, what'd you say, 2 ,200 versus 500.

15:47Jessica Rabe:But that is a massive skew away from concentration.

15:54Josh Brown:Right. So and that's a great point, Josh, because U.S. mega cap tech alone accounts for about 35 percent of the S &P versus only about 10 percent for comparable names in the rest of world index. So I thought now we could move on to my second point. And that's just how dramatic the recent move in non-U.S. stocks has been. And this next chart shows the trailing 100-day relative price returns between the S &P 500 and rest of world stocks from 2010 to the present. And since 2010, the S &P has beaten rest of world stocks by about three and a half percentage points over a typical 100-day holding period.

16:33Josh Brown:And as you can see in this chart, this relationship is asymmetric. And that's largely because of the S &P structural outperformance. When rest-of-world stocks catch up, the rotation tends to happen quickly and violently. So the recent 11 percentage point move in favor of rest of the world over U.S. large cap stocks is between two and three standard deviations. So it's extremely unusual. But per usual, this outperformance came right after a period when U.S. stocks were exceptionally strong, up 10 points or more than one standard deviation in September of 2025. five. And this next table shows what every investor knows, and that's namely that the S &P has outperformed rest of the world over the longer term.

17:19Josh Brown:So the three, five and 10 year annual compounded returns have beaten the S &P by four to six and a half percentage points. This really gets back at what Nick was talking about. In order for the S &P to keep its long run edge, U.S. big tech companies need to prove that their AI investments are worthwhile really over the next 12 to 24 months, and frankly, the sooner the better. Because if the three-year data starts showing rest-of-world outperformance, investors may start questioning whether big tech's AI investments have not fundamentally changed the story around U.S. stocks for the worse. And that brings me to my third and last point.

17:58Josh Brown:And that's that U.S. stocks have outperformed rest-of-world over the long term because U.S. companies leverage disruptive innovation at scale and are laser focused on growth and profitability. And the U.S. also dominates the global venture capital market. So public markets have a stronger and deeper pipeline of disruptive companies focused on monetizing gen AI because at the end of the day, it's disruptive innovation that drives longer on equity returns. And the U.S. markets have a strong bench currently with SpaceX, OpenAI, and Anthropik planning to go public this year or next. And we'd rather lean on believing in the track record of American capitalism and big tech's history of executing on its goals than assuming, you know, suddenly that's come to an end.

18:46Jessica Rabe:I meet with a lot of wholesalers, or at least I used to, a lot of wholesalers of equity funds, different themes, different strategies, styles. And whenever you met with the people selling international, invariably, they would say when international outperforms the US, it's typically not a one-year phenomenon. It's usually part of a multi-year cycle. And if you miss it, you're going to be in big trouble with your clients. When you had that second chart up showing how it oscillates back and forth, I mean, I guess the thing to say here is, yes, it looks like there are some extended stretches in 100-day trailing returns.