The AI boom has kept this bull market on fire. While no one doubts the transformative power of AI, and we don’t yet know the full impact, if the gigantic investments don’t yield substantial profits later, there will be problems. According to Greg Ip’s column in today’s WSJ, “investment in information processing equipment has expanded 23%, after inflation, while total gross domestic product has expanded just 6%.” Half of the GDP growth in the first half of the year was due to AI investments. AI is essentially driving this economy, mitigating some or all of the negative impacts of immigration and tariff policy.

Companies like Alphabet, Meta, Amazon, and Microsoft used to be free cash flow juggernauts. Since 2023, while net income increased for these companies by 73%, free cash flow declined by 30% to $40 billion, according to FactSet. Other start-ups like OpenAI and Anthropic are losing money.

These companies are no longer the asset-light businesses that investors fell in love with.