Schwab head of macro research and strategy Kevin Gordon has warned that a single capital expenditure shortfall among mega-cap technology companies could trigger broader market disruption, even as the S&P 500 trades just 1% below its all-time high. Speaking on Bloomberg This Weekend, Gordon highlighted a sharp divergence beneath the surface of benchmark indexes, noting that the average S&P 500 component stock suffered a 14% peak-to-trough drawdown since early August.
Key Takeaways:
- S&P 500 Divergence: The benchmark index rests 1% off its peak, but individual member equities averaged a 14% peak-to-trough drop since early August.
- Shift to CapEx: Kevin Gordon noted that "it's no longer earning season, it's CapEx season," emphasizing extreme reliance on mega-cap spending.
- Rising Forecasts: FactSet projects 32.4% S&P 500 earnings growth for 2026, up from roughly 15% at the start of the year.
- Credit Risks: Apollo Global Management chief economist Torsten Slok recently issued an AI debt warning over default insurance costs for cloud giants.
Concentrated Index Weight and Rising Growth Expectations
Because market-cap-weighted indexes like the S&P 500 are heavily dominated by top-tier tech firms, broad index levels have disguised internal weakness across average equities. While tech paused during parts of the summer rally, AI-related mega-caps have resumed carrying overall market returns as valuation concerns and public pushback ease. This concentration mirrors sentiment expressed in July by "Big Short" investor Steve Eisman, who stated that the entire stock market has effectively become "one AI bet."
Ahead of Q3 earnings season, market participants are tracking whether these massive corporate budgets can sustain increasingly ambitious targets. FactSet currently projects 32.4% S&P 500 earnings growth for 2026, a sharp increase from the roughly 15% estimate recorded at the start of the year.
Capex Vulnerability and Federal Reserve Policy
Gordon explained that a spending miss paired with pared-back corporate budgets is precisely where earnings disruption could begin. However, debt-funded expansion faces scrutiny beyond equity markets; last month, Apollo Global Management chief economist Torsten Slok warned that the cost of insuring cloud giants' debt against default signals expanding risk in debt-backed AI expenditures, particularly as infrastructure scale-outs face localized resistance.
On macroeconomic policy, Gordon argued that the best-case scenario for equity markets would involve Federal Reserve rate hikes occurring at roughly every other meeting. He suggested such a pace would not aim to slow growth sharply or destabilize the labor market.
Why It Matters
The market's heavy reliance on mega-cap capital expenditure means broader equity market health hinges on a handful of corporate balance sheets. If AI monetization lags behind elevated corporate spending, a reduction in capex could rapidly filter down into reduced corporate earnings and broader index pullbacks. Investors should monitor upcoming quarterly reports closely to confirm whether mega-cap capital commitments hold or if rising debt-servicing risks constrain corporate investment plans.
