Damodaran: AI Capex Is Distorting Earnings and Cash Flows

Aswath Damodaran wrote on 8 October 2026 that the trillions of dollars going into AI capital expenditure are showing up across the financial statements of US companies. Aggregate net income at US publicly traded companies rose from $576 billion to $904 billion between the second quarter of 2025 and the second quarter of 2026, a growth rate of 57%, he writes, while the cash returned to shareholders grew far more slowly.

He set out the analysis in a post on his blog, Musings on Markets, titled “Stock Prices, Earnings and Cashflows: The AI Effect plays through!”. Sharing it on X, he said he looks at how the spending has percolated through financial statements, “distorting book capital, earnings and cash flows”. The figures below are his, for all US publicly traded companies.

Who Spends and Who Books the Revenue

Damodaran splits the market in two. The builders of the architecture are the hyperscalers, which he names as Meta, Alphabet, Amazon and Microsoft, and their spending, he writes, will cause lower earnings “at least until the cap ex starts paying off”, as well as a hit to their free cash flows.

The same money becomes revenue for the suppliers. He lists chip makers, with Nvidia and TSMC leading the way, network equipment makers, power plant builders and data center real estate developers. He notes gray zones: Amazon spends on AI cap ex but also benefits from its cloud, and Nvidia, while selling the chips, is also investing directly or indirectly into data centers.

Cap ex in the second quarter of 2026 was up $133.4 billion from the second quarter of 2025, an increase of almost 36%, he writes. He says the top ten hyperscalers account for more than $2 trillion of the AI cap ex, and that technology, communication services and consumer discretionary each grew cap ex by more than 50% in the quarter-to-quarter comparison.

Bigger Balance Sheets

Accounting puts cap ex on the balance sheet as assets and raises the book value of whatever funded it, Damodaran explains. Across all US stocks, book equity increased almost 13% between the second quarter of 2025 and the second quarter of 2026, and total debt is up almost 8%, he writes.

In dollars, he puts the increase at $1.8 trillion in book equity and $1.9 trillion in book debt over the same period. In technology, book equity rose almost 30% and total debt about 18.8%, by his figures.

One Company’s Cap Ex Is Another’s Earnings

The spending lifts earnings for a simple reason, Damodaran argues: money spent on cap ex by a company building AI architecture “will become revenues (and earnings) for other companies that supply the building blocks for the architecture”. He calls Nvidia the biggest beneficiary of the AI cap ex boom so far.

There should be higher amortization at the builders, he writes, but “the longer amortization schedules being used by many of them is reducing the current hit to earnings at these companies”.

His figures: aggregate earnings rose from $511 billion to $692 billion in the first quarter of 2026, a growth rate of 35%, and from $576 billion to $904 billion in the second quarter, a growth rate of 57%. More than half of all companies reported declines in net income, he notes. Technology, financials and communication services saw the biggest increases; health care, utilities and real estate lagged.

Cash Returned Has Not Kept Up

Damodaran writes that the “higher earnings across firms will be partially or even fully offset by capital expenditures across firms”, so free cash flows grow more slowly than earnings, and those free cash flows fund dividends and buybacks.

Dividends in the last twelve months are up about $43.3 billion, or about 5%, from the 2025 calendar year, and stock buybacks are up about $106.7 billion, or about 9%, he writes. Those step-ups “clearly have not kept up with the earnings growth in 2026”.

For much of the last two decades, he says, US companies returned 80% or more of their earnings to shareholders. In his words, “in the last twelve months leading into 2026, the companies in the S&P 500 returned 63% of their earnings to shareholders”, which he calls “a low not seen since 2004”.

The Market Backdrop

The ten-year Treasury rate rose from 4.75% to 5.29% during September 2026, Damodaran writes, a move that would put it in the top ten percent of 770 monthly rate changes between 1962 and 2026. The market still added $2.5 trillion in market capitalization in September, and almost $1.5 trillion of that came from technology, he says.

His implied equity risk premium at the start of October 2026 was 3.70% over the ten-year Treasury rate, for an expected return on equities of 8.99%. He writes that the premium dropped below 4% for the first time this year.

If AI Disappoints

In his best case, AI investors earn returns on their cap ex above their cost of capital, lenders are made whole, and the companies emerge “more capital intensive than they used to be”. In his worst case, accountants write off large portions of the AI cap ex and companies that leaned on debt face defaults and distress.

His expectation is that “the market will lead in this process and accounting will follow”. In his words, “waiting to act until accountants write off AI cap ex to sell your AI company implies that you waited too long”.

He also discloses his own position. He holds five of the Mag Seven, all except Tesla and Nvidia, and says new money added to his portfolio in the last year or two has gone mostly into cash.

The Structural Read

On his numbers, aggregate net income rose 35% and 57% in the first two quarters of 2026, while dividends rose about 5% and buybacks about 9% over the last twelve months. The periods differ, so we read the comparison as directional rather than one-for-one.

His balance-sheet figures show how the spending was funded: book equity up $1.8 trillion and book debt up $1.9 trillion in a year, and in technology total debt up about 18.8%.

His own caveat is that joint ventures and off-balance sheet vehicles sit outside these numbers, and that private AI companies are not in his data at all. On his account, the aggregates are a floor on the effect, not the full picture.

Three Implications

AI BUILDERS Damodaran writes that the hyperscalers’ cap ex will cause lower earnings until it starts paying off, and a hit to their free cash flows, which are after cap ex.

AI SUPPLIERS In his account the same spending becomes revenue for chip makers, network equipment makers, power plant builders and data center developers, with Nvidia the biggest beneficiary so far.

SHAREHOLDERS He writes that S&P 500 companies returned 63% of their earnings in the last twelve months, against 80% or more for much of the last two decades.

The Business Engineer Lens

This story maps onto the Business Engineer framework The AI Capex Map & The State of AI Hyperscalers.

The map puts it this way: “the capex race is no longer a corporate spending cycle. It is a sovereign-scale financing problem dressed in tech-company clothing — and the financial architecture is starting to invert.”

As we read it, Damodaran’s aggregates show that financing story from the accounting side: $1.9 trillion more book debt in a year, and cash returned to shareholders falling to 63% of earnings on his S&P 500 figure.

What Is Not Established

Damodaran flags two limits himself. His figures are “data from publicly traded companies”, so private AI companies, including Anthropic and OpenAI, are missing. And because some AI cap ex sits in joint ventures and off-balance sheet entities, “the numbers you see in the public company financials will understate the full effect across all businesses”.

The text of the post does not put a single number on how much of the 2026 earnings increase comes from AI spending; his sector tables are images, and we have used only the figures he states in his text. His figures are aggregates across companies, not a ruling on any one company’s accounts.

The Bottom Line

Aswath Damodaran’s 8 October 2026 post traces AI capital spending through US company accounts: cap ex up almost 36% in the second quarter, book equity up $1.8 trillion and book debt up $1.9 trillion in a year, and aggregate net income up 57% in the second quarter, while dividends and buybacks rose about 5% and about 9%. He writes that S&P 500 companies returned 63% of their earnings in the last twelve months, the lowest since 2004.