Capex: Big Tech versus Oil & Mining and the Outlook for Free Cash Flow

Good Morning Ladies and Gentlemen

”Sicilians never want to improve for the simple reason that they think themselves perfect,” says Don Fabrizio. “Their vanity is stronger than their misery.”

Bloomberg’s “Balance of Power”

The appointed Federal Reserve Chairman, Kevin Warsh, has yet to receive Senate confirmation. In contrast to the sitting Chairman Jerome Powell, who would not oversee any further interest-rate reductions, Warsh is expected to implement three cuts. There exists a significant likelihood that during his inaugural meeting on June 17, Warsh will signal an intention to lower the key interest rate by 25 basis points. Moreover, breakeven inflation is a critical leading indicator of the U.S. inflation rate. As reported, the US inflation rate for January was 2.4%, below the anticipated 2.5%. This discrepancy can be attributed in part to base effects, and it is noteworthy that the month-over-month change was also less pronounced than projected.

Big Tech Capex

The capital expenditures (capex) of Big Tech, projected at USD 660 billion, appear remarkably high. This marks a significant increase from USD 410 billion in 2025 (a 60% rise) and from USD 245 billion in 2024 (a 165% rise). While there are concerns surrounding capex in the oil and mining sectors, areas that I find comparatively minor, it’s important to consider how Big Tech’s AI-related capital investments will translate into returns.

Versus Oil and Mining Industry Capex

Typically, capex in the oil and mining industries generates additional cash flow, including free cash flow, but it remains uncertain how Big Tech’s extensive capex will yield similar returns. The enormous capex spending in the tech sector has already led to a largely unrecognised sharp decline in free cash flow for big techs since mid-2024. EPS is holding up, debt is increasing, while free cash flow is decreasing. If EPS fails to meet investors‘ expectations, the stock prices will eventually suffer big time.

From Another Angle

Or, as my partner, Hans Schiefen, recently wrote, American and European oil and gas producers account for approximately 7.5% of the overall theme. Although the energy sector accounts for only about 3% of the S&P 500’s market capitalisation, it generates around 12% of the index’s free cash flow. This disparity underscores our strong interest in this sector. Following years of balance sheet restructuring and a more prudent approach to capital management, the industry is now well-positioned to deliver strong profits for its shareholders. Additionally, it presents a countercyclical potential should energy prices rise in the medium term.

More on Oil

I also find it interesting that India pledged to stop buying oil from Russia. This raises the question of who will buy Russian oil (most likely China), who will buy Iranian oil (most likely China and India), and who will benefit most from rising oil prices (most likely Russia). Since I believe the Trump administration will seek to avoid military escalation at almost any cost, given this year’s midterm elections and the risk of inflation.

Oil, Tech, IPOs and the S&P 500

However, it is also important to note that energy accounts for just over 3% of the S&P 500. According to the latest Bank of America survey, many investors are significantly underweight in this sector. While the AI bubble has not fully burst, it is currently in a deflationary phase. The record number of initial public offerings (IPOs) planned for 2026, such as SpaceX, valued at USD 1’000 billion; OpenAI, valued at USD 500 billion; and Anthropic, valued at USD 300 billion, has the potential to boost markets as these events approach. Nonetheless, fund managers are facing low liquidity reserves, with an average cash ratio of only 3.4%. As we also see a shift away from technology stocks towards commodities and energy, from large-cap to small-cap stocks, and from growth to value stocks, I find myself questioning where the cash for participation in these IPOs will come from. If fund managers participating in those IPOs do not want to increase their weighting in tech stocks, they will probably be forced to sell established names in the sector. Interesting, no?

Ladies and Gentlemen

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I wish you an excellent start to the day and weekend!

Yours truly,

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

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