Big Tech spending is reaching unprecedented levels, with hundreds of billions being poured into data centres, chips, and infrastructure. At the same time, the concentration of the “Magnificent 7” within the S&P 500 continues to grow.
Long-term portfolios, including pensions and retirement savings, are becoming increasingly reliant on the returns of a small group of firms. Is that a sensible bet?
Big Tech’s Big Spend
In 2026, the largest technology companies in the world are committing unprecedented amounts of capital to artificial intelligence and infrastructure. Alphabet (Google), Amazon, Microsoft and Meta together are expected to invest well over $600 billion in capital expenditures this year, a marked jump from even last year’s already high levels, and by some industry estimates this is among the biggest investment cycles ever seen in any industry.
For context, Amazon alone has outlined plans to spend approximately $200 billion in 2026 on cloud infrastructure, AI and related projects, up sharply from around $125 billion the year before. Google’s CapEx guidance, roughly $175–$185 billion, represents nearly a doubling from 2025 and speaks directly to the scale of investment these firms believe is necessary to compete over the next decade. Meta, traditionally not a leader in cloud infrastructure, is now planning to spend $115–$135 billion this year on data centres and AI platforms, the highest spend relative to its revenue in the group.
These companies genuinely believe AI will reshape how value is created across the economy. Not just through chatbots or consumer tools, but through productivity gains inside businesses, automation of routine tasks, faster software development, and more efficient data analysis. Whoever owns the infrastructure that delivers those capabilities sits in a powerful position. Amazon’s AWS, Google Cloud and Microsoft’s Azure are aiming to become the distribution layer for AI itself, and if adoption continues to scale, the prize is enormous recurring revenue.
But that belief alone doesn’t explain the scale or the urgency of the spending. The more important driver is competitive pressure. Once AI became compute-hungry, it stopped being something you could dabble in. Training and running large models requires vast amounts of specialised chips, energy and data centre capacity. If Amazon or Google under-invests today, they risk ceding customers tomorrow to a rival that can offer faster, cheaper or more reliable AI services. In that sense, this spending is defensive as much as it is aspirational.
This is where investor discomfort comes in. The heavy spending could look like companies are continuing projects simply because they’ve already invested so much. Chasing sunk costs makes investors hesitant, especially when it’s unclear how long it will take for the spending to translate into profits.
But from inside the industry, the cost of over-spending is lower margins for a few years. The cost of under-spending could be losing relevance in the next computing cycle altogether. When the downside of caution is existential and the downside of aggression is financial but survivable, rational firms choose aggression.
Their financial position makes that choice possible. These companies generate tens of billions in free cash flow each year and have access to cheap financing. Smaller firms don’t. So while the spending looks bold, it’s only feasible because they are already dominant. That creates a reinforcing loop: scale enables spending, spending protects scale.
This isn’t speculative spending in the way dot-com infrastructure was in the late 1990s, where many firms were building capacity without profits or clear customers. Today’s spend is coming from companies with real revenues, real demand and existing customers asking for AI-enabled services. The uncertainty isn’t whether AI will be used, but how long it will take before today’s investment shows up clearly in profits.
The Concentrated Returns of the S&P 500
A small set of large technology firms, the “Magnificent Seven”, now account for a disproportionate share of total market returns and market capitalisation.
To put numbers around that: as of late 2025, the Magnificent Seven, which include Apple, Microsoft, Amazon, Google (Alphabet), Meta, Nvidia and Tesla, made up roughly 35 per cent of the S&P 500’s total market cap and were responsible for a majority of its returns. In previous years, a broader range of stocks contributed meaningfully to index performance, but during the past couple of years this small group of mega-cap names has driven most of the gains.
The S&P 500 is often used as a proxy for the “market.” If only a handful of stocks are doing the heavy lifting, the index’s performance can obscure weakness elsewhere. For example, over parts of 2025, the collective performance of these top names diverged from the rest of the market. At times, they were down significantly on a year-to-date basis even as the headline index was flat or slightly higher, signalling dispersion within the group itself and within the broader market.
Is that inherently a bad thing? Not by definition. Strong companies commanding larger shares of earnings and capitalisation is a feature of competitive markets. These firms produce large revenues, increasing earnings and significant free cash flow relative to nearly every other company in the index. Many have entrenched market positions and significant competitive advantages in AI, cloud services or consumer ecosystems. That strength has justified, to some extent, their outsized share of the index.
But there are two reasons investors pay attention to concentration. First, when a small group of stocks accounts for much of the return, the broader market’s performance becomes highly dependent on the fortunes of those few. If one or two of the biggest names stumble, say, due to disappointing earnings, regulatory setbacks or slower growth, the index can suffer disproportionately. Second, high concentration changes the character of “market returns.” Instead of being diversified across industries and styles, the index ends up behaving more like a narrow tech bet. That matters for everyday investors using index funds in retirement accounts or savings strategies without active stock selection.
Another question is whether these concentrated returns can persist. Some analysts argue that the dominance of a few names reflects real economic shifts such as AI adoption and cloud infrastructure utilisation. Others point out that even within the Magnificent Seven there is variation, not all have shown the same performance patterns, and heavy capital investment cycles can create two-way risks.
This past month did, however, showcase the value of the diversified S&P 500. Several of the largest tech stocks were down sharply at times while the index moved only modestly. Even a highly concentrated index isn’t a monolith. The top seven do influence returns, but compared with holding individual stocks, the S&P 500 still spreads risk effectively.
For people making everyday decisions, from how much to allocate to equities in a retirement portfolio to how they think about risk, it means recognising that broad market indexes like the S&P 500 aren’t uniformly diversified. They still offer diversification benefits, but the risk profile can be skewed when a small number of companies dominate returns. This isn’t a reason to abandon index investing, but it is a reason to understand what you’re actually owning and why large cap tech sentiment matters so much today.
💼 Unpacked
Capital Expenditure (CapEx)
CapEx is money a company spends on long-term assets like data centres, servers, factories, or infrastructure. Unlike day-to-day costs, these investments are meant to generate returns over many years.
Market Concentration
Market concentration describes how much of a market or index is dominated by a small number of companies. In the S&P 500, a handful of tech giants now account for a large share of total value and returns, meaning index performance increasingly depends on how those few firms perform.
Free Cash Flow vs Operating Cash Flow
Operating cash flow shows how much cash a company generates from its core business. Free cash flow goes a step further, subtracting capital spending. It shows how much cash is truly available for dividends, buybacks, or debt reduction after investing in future growth.
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Sources
Featured Image: Four of the “Magnificent 7” that have announced higher than expected capital spending for the coming year. Wikimedia Commons.
