BlackRock, the world's largest asset manager, says Wall Street's attitude toward AI investment is undergoing a subtle shift. In recent years, the market was more willing to pay a premium for the AI narrative, but investors are now asking more pointed questions: when will the hundreds of billions of dollars in annual capital spending by Big Tech translate into profits, cash flow and sustainable returns?
This change is coinciding with recent volatility in technology stocks. The Nasdaq Composite just recorded its worst monthly performance since March 2025 as investors reassessed the scale of AI spending, financing costs and future profitability. BlackRock said the market's central focus has shifted from how much growth AI can deliver to whether that growth is sufficient to cover ever-higher costs.
The earnings composition of US equities has also shown a rare change. Over the past several years, the main drivers of index gains were the largest-cap technology platforms, but the latest forecasts show the earnings growth of these giants is being outpaced by other S&P 500 constituents. Excluding seven mega-cap technology companies, the remaining S&P 500 constituents are expected to post third-quarter earnings growth of about 29%, while the seven giants are forecast to grow about 18%. This marks the first such reversal since 2022.
Meanwhile, the market broadly expects overall S&P 500 third-quarter earnings to grow about 30%. If those estimates are realized, the index will have recorded earnings growth above 20% for a third consecutive quarter. The improvement in earnings is no longer concentrated in a handful of technology leaders but is beginning to diffuse across a broader range of industries. For investors, a market once propelled one-sidedly by large-cap technology stocks may be giving way to a more balanced corporate earnings cycle.
The speed of expansion in AI infrastructure investment is at the heart of market concerns. Related data show that capital spending by major cloud service providers and hyperscale data-center operators jumped from about $360 billion to $650 billion over the past year, an increase of more than 80%. Although these companies' overall operating margins remain relatively high, rising modestly from 26.9% to 27.1%, the profit efficiency of incremental revenue has clearly weakened. The incremental margin, a measure of how much additional operating profit is created by each extra dollar of revenue, has fallen from about 40% to 28%.
This means companies' revenue is still expanding, but their ability to convert new revenue into profit is fading. More direct pressure is coming from free cash flow. Rapidly rising capital expenditures are consuming cash, and free cash flow at some companies has even turned negative. With technology-stock valuations already elevated, investors are becoming less tolerant of burning cash to buy a future payoff.
BlackRock has not dismissed AI's long-term value because of these concerns. The firm says demand for AI remains robust, with continued growth in the cloud businesses of Microsoft and Alphabet indicating that corporate appetite for computing capacity, model services and related tools has not receded. More importantly, AI-driven efficiency gains are spreading beyond the technology sector. Research suggests that outside technology and communication services, companies with higher AI adoption are expected to grow earnings about 3 percentage points faster this quarter than companies with lower adoption.
This diffusion may reshape how markets hunt for opportunities in the coming years. Capital may not continue to concentrate in a few AI giants; it could instead flow toward ordinary companies that can turn AI into productivity gains, lower costs or stronger pricing power. In other words, the AI dividend is no longer just a story for chipmakers, cloud providers and large-model companies; it is also entering manufacturing, services and the broader real economy.
Changes on the financing side are equally important. As investment in data centers, computing capacity and supporting energy infrastructure expands, an increasing number of AI-related projects are relying on debt financing. BlackRock noted that credit markets are gaining importance, and that corporate bond funding costs, credit spreads and the bond market's absorption capacity will influence whether the AI investment boom can be sustained. If yields rise or credit spreads widen, the return potential of capital-intensive projects may be further compressed.
When US technology stocks were sold off last week, the US Treasury market moved higher. After the Federal Reserve held interest rates steady, the US 10-year Treasury yield fell by nearly 6 basis points last week to 4.93%. The simultaneous decline in tech shares and rise in Treasuries suggested that when risk appetite for AI-related assets cools, investors still turn to government bonds as a safe haven to some degree.
In response to this environment, BlackRock has adjusted its asset-allocation stance. The firm downgraded its view on US equities to neutral last month to lock in some of the gains accumulated in the previous rally. BlackRock also emphasized that its confidence in AI's long-term fundamentals has not changed, but it prefers companies that can benefit from bottlenecks in AI infrastructure build-out and publicly listed infrastructure assets, rather than simply chasing valuation expansion among large-cap technology firms.
This judgment also influences its view on emerging markets. BlackRock is overweight emerging-market equities, particularly Asian markets. As global AI investment continues to expand, semiconductor manufacturers, equipment suppliers and other companies in critical links of the AI supply chain may benefit from rising demand for computing capacity and constrained infrastructure supply.
Macroeconomic data will also become an important variable in market repricing. Investors are awaiting the October US nonfarm payrolls report due Friday. BlackRock expects the report may show stronger wage-growth pressure, which could further push up core services inflation and introduce new uncertainty into the Federal Reserve's policy outlook and the US Treasury market. If wage growth comes in stronger than expected, markets may reassess inflation trends and the interest-rate path, in turn affecting technology companies' funding costs and valuation levels.
