Increased AI capital expenditure may end the "buyback era" of US stocks. Nomura strategist warns it could lead to a "de facto tightening".

The stock buyback wave in the US stock market for more than a decade is facing the risk of being squeezed out by the capital expenditure era of artificial intelligence (AI). As competition among tech giants in the AI field intensifies, the free cash flow that companies use for buybacks may be swallowed up by the costs of investing heavily in data centers, chips, and model training. Nomura strategist Charlie McElligott warns that the explosion of AI capital investment, combined with potential economic and inflation acceleration, may trigger a "de facto tightening," changing market expectations for future interest rate trends. McElligott points out that if the economy and inflation strengthen, the wealth effect on the stock market will further loosen financial conditions, forcing the market to reprice the Fed's policy path and make the previously expected easing space more limited. In this scenario, even if the Fed does not actively raise interest rates, the market may still tighten financial expectations due to prosperity, constituting a hidden tightening. At the same time, the AI theme is becoming a core force driving the entire stock market. However, this trend also brings another important impact: companies will continue to increase capital expenditures in order to expand data centers and catch up in AI infrastructure, leading to widening credit spreads and rising financing costs. More importantly, massive AI investments will seriously deplete companies' free cash flow, weakening their ability to execute stock buyback plans. McElligott frankly states that one of the strongest drivers of the US stock market's rise in the past 15 years, corporate stock buybacks, may be forced to slow down or even retreat due to AI. Related charts show that the growth of free cash flow for large tech companies such as Amazon.com, Inc. (AMZN.US), Alphabet (GOOG.US, GOOGL.US), Meta (META.US), Microsoft Corporation (MSFT.US), and Oracle Corporation (ORCL.US) is under significant pressure, while the scale of buybacks by S&P 500 companies continues to rise, creating a clear contradiction. If AI capital expenditures continue to expand, tech giants may be forced to reduce or even pause buybacks in order to retain cash for key AI infrastructure investments. This means that an important force that has long supported the rise of the US stock market may reach a turning point in the AI era.