S&P 500 Climbs After Bout of AI Caution as Traders Seek Winners

The S&P 500 rose in recent trading as market participants adjusted their positions in the face of growing concerns about artificial intelligence (AI) capital expenditures among large technology firms. Analysts have pointed to these escalating capex budgets as a potential red flag for stock valuations, citing the risk of cash-flow negativity among major players.

Investors have been alternating between bidding up and selling off tech stocks based on quarterly earnings and speculative fears about AI's long-term impact on business fundamentals. Firms like Meta, Alphabet, and Amazon have disclosed substantial increases in their AI-related spending, raising questions about the sustainability of their current financial strategies.

Debt levels are rising among big tech companies as they seek to fund their AI ambitions. Alphabet alone raised more than $30 billion in the past week, signaling the sector's shift toward debt-driven expansion. However, corporate debt remains below the median for S&P 500 companies, according to analysts.

Why Did This Happen?

Free cash flow (FCF) is a growing concern for big AI hyperscalers. Current spending on AI infrastructure could lead to negative FCF in the near term, signaling a potential red flag for investors.

Analysts have noted that one of the sector's key warning signs has already been triggered. FCF for hyperscalers has dropped below 2022 levels, raising concerns that these companies may soon see a reversal in their cash-generative performance.

How Did Markets React?

Nvidia, a key player in the AI hardware market, has seen mixed performance in recent days. On February 18, shares rose about 1% ahead of its upcoming fourth-quarter earnings report. The company is expected to report strong results, with revenue and earnings estimates suggesting continued growth according to market analysis.

The AI chipmaker has exceeded Wall Street expectations in 20 of the past 22 quarters, making it a bellwether for the sector. Demand for its new Blackwell AI data center platform has surged, with production scaling up to meet orders from hyperscale cloud operators and major software firms.

Analysts are watching closely for any surprises in Nvidia's forward guidance. While past results have been strong, the market may react more to future outlook than to current figures.

What Are Analysts Watching Next?

Apple has faced challenges in its AI rollout, leading to a 5% drop in its shares following delays in its Siri 2.0 and Apple Intelligence features. The company had initially aimed to ship the first wave of improvements in iOS 26.4 by March but pushed key features to later versions.

Despite the setbacks, Wedbush analysts argue that the sell-off is unwarranted and that 2026 could be a pivotal year for Apple's AI ambitions. The firm has reiterated an Outperform rating on Apple, citing the company's potential to integrate AI across its vast ecosystem of devices.

Apple is also investing in new AI-powered wearable devices, including smart glasses and a pendant, as it seeks to position itself more prominently in the AI era. These products will be linked to the iPhone and rely on the Siri assistant for functionality.

Investors remain cautious as Apple works to refine its AI strategy. However, Wedbush notes that the company's potential to monetize its AI platform could significantly enhance its valuation over the next few years.

In the broader market, analysts are closely monitoring AI-related developments for signs of overvaluation or potential bubbles. While some warn of systemic risks, others argue that the AI trade remains a strong growth story with room for correction.

Despite the volatility, the S&P 500 is expected to hit 7,750 by the end of 2026, according to Evercore ISI analysts. They note that while leverage is rising in the sector, overall corporate debt levels remain relatively healthy.

Nvidia's upcoming earnings report on February 25 will be a key event for the market, offering a clearer picture of the AI sector's trajectory. The company's performance is seen as a barometer for the broader tech market and investor sentiment toward AI investments.

As the market continues to navigate the challenges and opportunities of AI, investors are advised to remain cautious but also to recognize the long-term potential of the sector. Analysts suggest that while risks are present, the AI-driven growth story is far from over.