Record AI spend is changing the market hunt for 'cash cows' and 'quality' stock investments

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.

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 generally performed pretty well – even if they’re not targeting high free cash flow explicitly, they are still focused on quality – and free cash flow is often a component of that quality metric,” Evens said.

But importantly, these funds often define the “Mag 7” as top quality bets.

The $48 billion-asset iShares MSCI USA Quality Factor ETF (QUAL) has seen strong inflows in the past month, with one-month net inflows of around $308 million in the past month, according to ETFAction.com. It has a relatively low expense ratio of 0.15%. Microsoft, Apple, Nvidia and Meta are the top four holdings in the ETF.

While the iShares ETF is more or less keeping pace with the market, up roughly 13% through Sept. 28, according to Morningstar, which matches the S&P 500, other quality ETFs have pulled ahead.

The $9 billion-asset JPMorgan U.S. Quality Factor ETF (JQUA) is up roughly 18% year to date, according to Morningstar. It has taken in roughly $300 million over the month, and has an even lower expense ratio than QUAL, at 0.12%. The top eight holdings in JQUA are all tech, including Meta, Microsoft, Nvidia and Alphabet.

The $3.2 billion-asset WisdomTree U.S. Quality Growth Fund (QGRW) is up nearly 17% year-to-date, according to Morningstar. It had one-month net flows of around $153 million. Its expense ratio is set at 0.28%. The tech concentration within top holdings is reflected in this ETF as well.

Even as some quality factor ETFs beat the S&P 500, they have not beat leading momentum trades in the ETF wrapper.

The iShares MSCI USA Momentum Factor ETF (MTUM), which is more heavily concentrated in the hot chips and memory trades at the top of its holdings list, is up over 26% year-to-date. But the trade is fading of late. MTUM is down 7.7% quarter to date, putting it on pace for its worst quarterly performance since 2Q 2022, according to CNBC data. Roughly $5 billion has been pulled from the $20 billion fund over the past month, according to ETFAction.com.

And a Mag 7 that has lagged the S&P 500 in 2026 has shown signs of a comeback. The Roundhill Magnificent Seven ETF (MAGS) is up less than 9% in 2026, trailing the S&P 500. But over the past month, MAGS is up close to 3.5% while the S&P 500 has struggled to stay positive.

“The Mag 7 had been the ‘Lag 7’ all year as the hot money went after the hot AI buildout stocks, such as the memory names, but now, with all of the chatter around AI fears, the Mag 7 names are back en vogue,” according to recent stock market commentary from Richard Reyle, chief investment officer of Questar Capital Partners based in Paramus, New Jersey. 

“With the exception of Nvidia (NVDA), the feeling is that Microsoft (MSFT), Amazon (AMZN) and Alphabet (GOOGL) have huge cash-flow-generating legacy businesses that are not directly tied to AI and can withstand any AI cooling or negativity,” he wrote. “If there’s a pullback on AI spend, they have a diversified business model and can rely on their legacy businesses.”

Charles Kantor, managing director and senior portfolio manager at Neuberger Berman, recently told CNBC that for all the skepticism surrounding the negative free cash flow for these companies, it is the long-term rate of return from the investments being made today that will ultimately pay off. “Everyone loved when they bought back their stock but not when they are investing in their businesses,” Kantor said.

It is hard for investors to “wrap their heads around the magnitude of investment,” he said.

In addition, the companies have not revealed as much as they could to convince investors (though he said maintaining competitive advantage might make that difficult to do).

But he added, “Our work around these types of returns is we think if you can get over the fact that you won’t see returns for a while, they will be very attractive. … At some point, folks are gonna come back to the quality factors, to the businesses that are moated, and say these are very attractive entry points.”