2026 Third Quarter Commentary

AI investment and expanding government borrowing are likely to crowd out other borrowers, keeping interest rates higher and favoring companies with resilient balance sheets.

• AI-related infrastructure spending is expected to equal approximately 3.63% of U.S. GDP annually from 2025 through 2032.
• Alphabet, Amazon, Meta, Microsoft and Oracle are expected to spend about $800 billion on capital expenditures in 2026, up from $381 billion in 2025, with the group forecast to generate negative free cash flow in 2027.
• Oracle raised its fiscal 2027 capital-expenditure guidance from $60 billion to $90-$95 billion, potentially pushing net debt above 4x EBITDA and prompting an S&P credit-rating downgrade.
• The Big Five’s incremental debt issuance reached 32% of capital expenditures in the twelve months to June 30, 2026, versus 9% in fiscal 2024, while AI companies announced more than $100 billion of additional debt and equity raises after the second quarter.
• The U.S. trailing twelve-month federal deficit was $1.95 trillion as of July 31, 2026, while interest expense reached $1.26 trillion as of April 30, up 110.5% and 120.0%, respectively, since April 2019.

Takeaway: Investors should favor companies that can fund operations internally and avoid refinancing dependence, while recognizing that higher defense spending, geopolitical competition and AI investment could raise capital costs even for non-AI businesses.