S&P 500 companies are on course for a third consecutive quarter of earnings growth above 25%, according to FactSet, and profit margins reached 17% in the April–June period, the highest in its data back to 2009. Yet the cash underpinning those results has been weakening for two years, largely concentrated in a small group building AI data-centre capacity. The shortfall is partly timing: large outlays are paid upfront but reach the income statement gradually through depreciation, meaning the gap ultimately feeds back into earnings as those charges accumulate.
Bank of America’s strategists measure free cash flow as a share of reported profit and put the next-12-month ratio at about 85% for most of the index, versus roughly 90%–95% between 2016 and 2023, while hyperscalers sit near -15%. For the four biggest spenders—Microsoft, Alphabet, Amazon and Meta—capital expenditure in the April–June quarter was $165 billion against $37 billion of depreciation, compared with $88 billion and $25 billion a year earlier; operating profit rose to $128 billion from $105 billion, leaving around $7 billion of cash after equipment spending. They are projected to spend about $730 billion in 2026 with depreciation near $150 billion annually, and Moody’s expects the largest cloud companies’ spending to approach $1 trillion in 2027; FactSet forecasts 65.1% third-quarter technology earnings growth, led by chip makers. Buybacks face pressure: S&P Dow Jones Indices puts repurchases at about $1 trillion a year of S&P 500 share demand, but Alphabet and Meta bought back $72 billion in 2025 and none in H1 2026, when Meta borrowed $24.9 billion and Alphabet raised $49.6 billion via equity and convertible preferred issuance.
Impacts of High Capex on Margins and Cash Flow
S&P 500 Q3 2026 earnings estimates show tech leading growth at around 18% to 20% year-over-year, while total mega-cap tech capex for 2026 is projected to exceed $300 billion to $400 billion. Historically, during high-capex cycles like the tech buildout of the late 1990s, free cash flow margins compressed sharply before earnings figures reflected the slowdown. We should expect similar structural friction to hit reported net margins as multi-year depreciation schedules roll forward.
Derivative Strategies and Trading Opportunities
As we head into late October 2026 earnings reports, we must position derivative portfolios for heightened implied volatility spikes around mega-cap announcements. With options skew currently reflecting cheap tail-risk protection relative to historical earnings quarters, buying long straddles or calendar spreads on key hyperscalers can capture pre-earnings volatility expansion. This protects exposure against sudden margin compression disclosures when operating income figures are released.
We should also consider using put spreads on broad market indices to hedge the structural lack of share buyback support. Historically, corporate buybacks accounted for over $900 billion in annual equity demand, providing a steady floor during market pullbacks. Without this cash-flow cushion from major tech players, downside moves in the index could become far more aggressive and unbuffered.
For relative value trading, we can look at dispersion strategies between semiconductor manufacturers and hyperscale buyers. As long as capex spending stays elevated, short-term earnings for chipmakers will outpace the cash-starved cloud giants, creating a clear long-short opportunity using equity options. However, we need to monitor guidance closely, as any hint of a capex cut will rapidly collapse chipmaker call premiums.
