Key Takeaways:
A $760 billion capital spending boom by five hyperscalers is juicing S&P 500 earnings today — but the depreciation bill that follows could reshape the market's valuation.
S&P 500 companies are posting earnings growth above 20 percent for a second straight quarter, fueled by surging profits at AI infrastructure suppliers. The catch: much of that growth stems from an accounting lag where equipment makers book revenue immediately while their hyperscaler customers defer the costs as depreciation over years.
"This is a golden window where everybody looks good," said Todd Castagno, an accounting analyst at Morgan Stanley. Revenues and margins appear strong across the AI ecosystem, from chip suppliers to the data-center builders.
The five largest hyperscalers — Alphabet, Amazon, Meta, Microsoft and Oracle — spent $412 billion on capital expenditures in calendar 2025, according to S&P Global Market Intelligence. Analysts estimate that figure will surge to about $760 billion in 2026, while their combined depreciation and amortization expenses run at roughly $211 billion, per Visible Alpha data. The gap means free cash flow at the five companies is projected to crash 91 percent to about $16 billion next year, even as net income rises 25 percent to $506 billion.
The divergence in analyst estimates for future depreciation highlights a blind spot that leaves earnings forecasts vulnerable. For Meta's 2028 numbers, the standard deviation of D&A estimates is 24 percent of the average, compared with just 4 percent for revenue forecasts, according to Visible Alpha. With the S&P 500 trading at about 22 times forward earnings — above historical averages — the stakes are high for investors betting the AI titans can generate enough revenue to justify the spending.
David Zion, founder of Zion Research Group, said the consensus D&A estimates for hyperscalers "could be systematically understated." The wide dispersion reflects limited transparency: most hyperscalers shifted to capital-intensive business models only recently, and they don't disclose how much depreciation is allocated to each expense line. Companies also have wide discretion to set the useful lives of fixed assets, which directly changes yearly depreciation charges.
The $549 billion gap between 2026 capex estimates ($760 billion) and D&A estimates ($211 billion) represents costs that have already been incurred but haven't yet hit income statements. A significant portion of the data-center build-out is being financed off-balance-sheet, adding further complexity.
Current consensus forecasts have the five hyperscalers' earnings compounding at about a 20 percent annual rate through 2029, with free cash flow rebounding sharply to $185 billion in 2028 and then soaring to $387 billion in 2029. The V-shaped recovery assumes capital spending growth will taper after next year while revenue keeps surging.
But nobody knows how this will play out. Amazon and Oracle are expected to post negative free cash flow in 2026, while Meta's will be only slightly positive. If the capex boom persists longer than expected, the depreciation wave could compress margins for years, challenging the earnings growth that has propped up the S&P 500's valuation.
This article is for informational purposes only and does not constitute investment advice.
