Do moderating capital expenditures by information technology companies signal headwinds for the sector?

Information technology has been among the best performing S&P 500 sectors in recent years, advancing 56.4% in 2023 and 35.7% in 2024, led by artificial intelligence (AI) bellwether, NVIDIA, which increased 239% and 171% in 2023 and 2024, respectively. This year, returns are different. As of Tuesday’s close, the information technology sector has retreated 1.7%, with NVIDIA down 3.3% for the year. This pullback can be attributed to several factors such as concerns of widespread economic slowing, and manufacturing supply chain and end-market disruptions associated with tariffs.

For investors, this lackluster year-to-date performance introduces concern that the billions of annual capital expenditures (capex) directed toward the buildout of AI infrastructure is beginning to plateau. “Slowing capex trends may portend a prolonged period of weakness for the sector until some measure of return on this investment can be discerned,” says Terry Sandven, chief equity strategist with U.S. Bank Asset Management Group.

Capital expenditure growth trajectory declining

“Healthy capex has supported economic growth,” says Bill Merz, head of capital market research with U.S. Bank Asset Management Group. In recent years, year-over-year capex growth has increased in the low double digits, according to Bloomberg, spurred by investment in AI infrastructure such as data capture, storage, processing, software and analytics, security, distribution, and electrification. “Several companies and Federal Reserve officials are now projecting capex levels over the next year or two to be flat to up mid-single digits,” Merz notes. To-be-determined is whether any moderating growth of capex spend will result in economic slowing or more muted returns for tech-related sectors and companies. Importantly, capex as of a percent of revenue has remained relatively stable for the past decade, as illustrated in the accompanying graph.

Why is projected growth of capex spend slowing?

Moderating growth of capex trends can partially be traced to DeepSeek, a Chinese AI start-up company founded in 2023 that has stirred awe and consternation in Silicon Valley after demonstrating breakthrough AI models that offer comparable performance to the world’s best chatbots at a fraction of the cost. Lower cost computing makes AI adoption much easier and cheaper for developers and enterprises to build new applications, thus potentially enabling many companies to do more with less capex.

Hyperscaler capital expenditures remain robust

In the first quarter of 2025, all four leading hyperscalers (companies with a distributed computing architecture that enables massive scalability to handle big data, cloud computing, and artificial intelligence) – Amazon, Google (Alphabet), Meta Platforms and Microsoft – reported sharply higher capex. For example, Meta’s first quarter capex was $13.7 billion, and the company raised its full-year 2025 outlook to $64–72 billion (up from $60–65 billion previously) to support AI and hardware cost increases. Microsoft’s capex (including leases) was $21.4 billion, on track toward $80 billion for the year. Alphabet (Google) spent $17.2 billion in the quarter and plans about $75 billion for 2025. Amazon’s capex was $24.3 billion, as it doubles down on Amazon Web Services (AWS) with a roughly $100 billion 2025 budget. All these figures significantly exceed prior-year levels and consensus expectations.

An explosion of artificial intelligence use cases

The hyperscalers’ robust spending patterns reflect each company’s cloud/AI ambitions. In general, companies continue to spend enormous amounts of money on AI capex, and for good reason. “Investment in AI-related products and services is the lifeblood of technological innovation,” says Terry Sandven, chief equity strategist, U.S. Bank Asset Management Group. “Fast is getting faster…and speed, scale and efficiencies do not occur without technology.” Sandven says technological innovation is what allows companies to solve problems, grow market share, and maintain competitive advantages.

Looking forward, the capex surge is expected to persist, at least in 2025 for the hyperscalers. Meta’s CFO said the majority of 2025 capex will go to its core business with a focus on infrastructure to support generative AI and expand its core app network, including additional data center investments. Google anticipates accelerating cloud growth once capacity catches up (with peak deployments in late-2025). Microsoft signals continued increases in capex spending to expand Azure capacity worldwide while acknowledging quarterly variability as projects ramp up. Amazon expects AWS demand to keep climbing and is expanding its data-center footprint (e.g., large new cloud campuses in Virginia, Ohio,). In short, the first quarter reflects massive AI and data-center investment; the hyperscalers are all “plowing full steam ahead” on infrastructure, betting that today’s capex will unlock dominant market positions and revenue growth over the next decade.

In economics, “Jevons paradox” occurs when technological advancements make a resource more efficient to use, thus reducing the cost of the application and associated capex requirements. However, as the cost of using the resource drops, overall demand increases as applications expand, thus serving as the basis for ongoing capex spend. s with past trends, capex and revenue should be directionally consistent. For tech investors, both the pace of capital expenditure growth and revenue growth trends may be key factors in assessing the prospects of future performance.

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