By one recent estimate, the AI buildout will cost more than most major economic transformations in the history of the U.S. economy. "The projected buildout would be larger relative to the economy than the major U.S. canal, railroad, electrification, highway, and telecommunications investment booms," wrote Columbia Business School professor Stijn Van Nieuwerburgh in a paper delivered at a Brookings Institution event last week.
That AI spending is pressuring cash flow at major technology companies, among the most profitable in the history of the world. Meanwhile, the bond market is having trouble digesting the sheer amount of AI-related debt companies want to issue, pushing more deals into junk bond territory, and with AI among factors being cited in the recent market-wide rise in yields.
For some investors, the volatile situation is leading to a more intent focus on core balance sheet metrics led by free cash flow, which measures the cash left over after expenses, interest, taxes and long-term investments.
Return on equity, net debt leverage and earnings consistency have also moved to a more central location on the radar of investors, said Todd Rosenbluth, head of research and editorial at TMX VettaFi.
Just how much companies are spending to generate long-term growth on AI, and which companies can actually handle that capex load, are implicit in the flight to quality mindset. "With expectations that spending on AI is being revisited, investors are turning toward companies that they have confidence will continue to grow despite the shifting environment," Rosenbluth said.
At times, investors are willing to pay a premium and take more risk for future growth, such as during periods of low interest rates and high growth. That sentiment is shifting somewhat amid rising rates and tightening monetary policy, with some investors becoming more cautious. IPOs are being pulled — some deals related directly to the AI buildout are reportedly being delayed at least for now.
For the S & P 500 as a whole, one of the more surprising dynamics of 2026 has been a price-to-earnings that has declined even as the stock market sits near record levels. Wall Street analyst estimates for earnings keep going up, but investors are not acting as if it is a time to speculate on valuation growth.
Investors increasingly don't want exposure to companies that are taking on excess debt or that have the potential to overshoot by using too much debt at higher rates, according to Shawn Snyder, economic strategist at Potomac Fund Management in Bethesda, Maryland.
Most corporate debt is pegged to the 10-year Treasury, and as investors watch the 10-year Treasury hover around 5%, they're looking for higher-quality names in their portfolios, Snyder said. "You want to focus on companies that have stronger free cash flow and are less reliant on debt at higher interest rates," he said. "Cash today is worth more than the promise of cash tomorrow," he added.
US10Y YTD line Performance of the 10-year U.S. treasury bond in 2026.
An August report by Raymond James' James Investment Group in Iowa City, Iowa, noted to investors that the situation is bringing the sustainability of the AI sector's momentum into focus. "Investors are increasingly looking for the legs to stand on" when it comes to AI growth, said Zachary Evens, manager research analyst at Morningstar.
For example, they want to make sure companies have viable business models to support the AI buildout, a user base and a viable business model when placing value on their shares.
The free cash flow of the market's richest tech companies Until recently, the tech hyperscalers generated enough cash to comfortably fund investments. "However, by the second quarter of 2026, aggregate capex began to exceed operating cash flow, pushing free cash flow into negative territory," the Raymond James investment planning group wrote.
That is not necessarily a bearish call on these stocks. "Importantly, these companies remain extraordinarily profitable, so the issue isn't profitability. It's that AI investment has become so large that even their substantial cash flows no longer fully cover it," the Raymond James team added.
Its analysis found that the technology sector of the S & P 500's FCF yield (FCF divided by market cap) was roughly in line with the S & P 500 average of 4%. But it illustrates well the magnitude of the issue in the markets and the underlying question more investors are asking. "FCF is not static and capital spending is cyclical.
With AI adoption still in its early stages, data center investment is surging. Over time, as more data centers come online, hyperscalers should be able to moderate capex while benefiting from the additional revenue those facilities generate," the report concluded. According to data from the U.S. Census Bureau and St.
Louis Fed, construction spending on AI data centers has increased by $51 billion since December 2023. Private construction spending on everything else has declined by $120 billion.
For many investors, free cash flow is a measure worth following. "Companies that generate sustainable free cash flow, maintain strong competitive positions and allocate capital effectively are generally better equipped to navigate economic uncertainty, changing competitive dynamics and periods of market volatility," Morgan Stanley wrote in a July report.
While there aren't a ton of funds that focus primarily on free cash flow, investors are showing piqued interest. The VictoryShares Free Cash Flow ETF ( VFLO ) has had notable inflows — a proxy of investor interest — in the past month. It is an $11 billion ETF that has seen monthly net inflows of over $900 million, according to the latest data from ETFAction.com.
It has an annual net expense ratio of 0.39%. There are other ETF options targeting the same theme, but none have attracted the recent interest level of the VictoryShares fund. The Pacer US Cash Cows 100 ETF ( COWZ ), which has $18 billion in assets, saw a much smaller bump in net inflows of just $24 million over the past month. The fund has an expense ratio of 0.49%.
The top holdings in these ETFs reflect a much broader view of the market than quality as defined by the richest tech stocks. While a tech stock is the top holding in each (Micron in the case of VFLO and Qualcomm in the case of COWZ), healthcare, energy, professional services, insurance and defense sector names are also among top 10 holdings.
Another fund in this category, the Amplify COWS Covered Call ETF ( HCOW ), uses covered calls on top of a cash flow strategy to generate income for investors. It had one-month net inflows of about $804,000 through Sept. 25. It is in the increasingly popular category of funds for baby boomers due to its focus on income, and has a higher expense ratio of 0.65% due to the use of options.
But it remains a very small fund, at $17.2 million in assets roughly three full years after its Sept. 2023 launch. More cash-flow-focused funds are coming to market. Pacer recently expanded its lineup of strategic funds earlier this year with the Pacer S & P 500 Quality FCF R & D Leaders ETF ( QFRD ) and the Pacer S & P 500 Quality FCF High Dividend ETF ( QFHD ).
The Pacer R & D ETF seeks to track the S & P 500 Quality FCF R & D Leaders Index, which measures the performance of 50 companies within the S & P 500 that exhibit high research and development intensity while maintaining superior free cash flow margins.
The Pacer high-dividend ETF tracks the S & P 500 Quality FCF High Dividend Index of companies within the S & P 500 that have maintained consistent dividend payments for at least five years while meeting high free cash flow quality requirements.
Other quality-focused ETFs, and the 'Lag 7' see uptick in interest To be sure, other ETFs that look at free cash flow along with other metrics such as return on equity, net debt leverage, and earnings consistency, have been gaining recent interest from investors. "High-quality ETFs have ge