Cash flows are under pressure. Free-cash-flow (FCF) generation for the hyperscalers is poised to turn negative next year for the first time, according to our forecasts. Even fast-growing AI revenues will take time to offset the scale of investment. These trends could eventually erode profitability and challenge valuations. How each company manages these dynamics will determine whether they succeed or fail in translating the promise of AI into returns for investors.
Record IPOs: Funding the Next Phase
Investors are also scrutinizing a wave of AI-related initial public offerings (IPOs). Here, too, the key issue is whether future earnings justify expectations.
Anthropic and OpenAI, two leading AI technology firms, are expected to go public later this year and have no profits. Demand for these IPOs will indicate investors’ appetite for funding the next phase of the AI story.
Two large share offerings in the second quarter showcased market sentiment. In early June, Alphabet (Google’s parent), raised $85 billion in a share offering partially backed by Berkshire Hathaway. As AI funding shifts to public markets, we believe financing discipline—and a credible story for investors—will matter as much as technology prowess.
In mid-June, Elon Musk’s SpaceX raised $75 billion in a record IPO, after which the company’s market capitalization peaked at $2.6 trillion. The deal showed that investors are still willing to pay premium prices for transformational technology potential, even without tangible profits. But post-IPO trading volatility was a reminder of how quickly sentiment can shift.
Don’t Let IPO Excitement Override Discipline
Investors are naturally drawn to marquee IPOs. But we think participation decisions should be grounded in a portfolio’s philosophy, disciplined research and an assessment of a company’s long-term merits. Different portfolios should assess share offerings through distinct investment lenses. Ultimately, the decision to invest should reflect whether the company’s fundamentals and valuations align with the strategy’s profile.
Large IPOs could also introduce benchmark considerations if new listings are added to major indices. In such cases, we believe underweight positions should reflect a balance between conviction in not holding the stock and the relative risk.
Technical Market Risks Deserve Attention Too
Beyond stock-specific risk, the IPO wave may add technical risks to markets. For years, share buybacks helped absorb stock issuance and investor selling, which supported valuation multiples and damped volatility. As companies issue more debt and equity with declining free cash flows, net buyback activity could decrease. Substantial new issuance—from IPOs, follow-on offerings and the release of locked-up shares (180 days post IPO)—could force investors to absorb much more equity supply than in recent years.
Over the long-term, market returns are usually driven by earnings and economic growth. But shifting supply and demand can affect market dynamics at turning points. If issuance accelerates while net buybacks slow, we believe equities could lose an important tailwind. A market with more sellers and fewer natural buyers could be more vulnerable to volatility, multiple compression and sharper reactions to disappointing news—even if fundamentals remain solid.
Earnings Backdrop Remains Supportive
For now, fundamental signals look resilient. Earnings growth has been strong beyond technology, including materials, financials and healthcare (Display). This is creating fertile ground for active managers to identify opportunities across sectors and regions. We believe broad exposure to high-quality businesses remains central to capturing long-term equity return potential and mitigating risk.
