Earnings, Cashflows and Stock Prices: The AI Storm blows through!
The key reason that US equities have held their own this year, in the face of rising interest rates, is a surge in aggregated earnings, which some have attributed to the massive investments in AI cap ex. In this session, I start by updating my market views to October 1, by bringing in September's explosive rise in rates and updating my estimates for expected returns and equity risk premiums for US stocks. I then turn to the real focus of this session, which is looking at how the trillions being invested in AI cap ex are playing through income statements, balance sheets and cash flows for the AI builders (who are spending the money on the AI cap ex) and the suppliers of the AI architecture (chips, networking equipment, power, cooling and real estate. Across all publicly traded firms, AI cap ex has significantly bulked up balance sheets, with both book debt and equity rising, and at least in the aggregate, increased earnings, as the amortization of AI cap at the builders (which lowers earnings) is being swamped by the net income generated by the AI suppliers, from providing the ingredients. In the aggregate, US companies are generating less in free cash flows, and dividends and buybacks are growing far more slowly than earnings. I close with an assessment of the choices we face as investors, as the AI storm roils the waters.Slides: https://pages.stern.nyu.edu/~adamodar/pdfiles/blog/MktandAI2026.pdf
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