US hyperscaler capex will reach $700 billion in 2026 but investors worry that aggressive spending could lead to overbuild and weak returns, according to a new report from Moody’s Ratings.

Moody’s said this record investment is six times 2022 hyperscaler capex. It is, unsurprisingly, driven by AI demand growth and is driving revenue growth among the hyperscalers.

While the scale of this spending is “unprecedented,” Moody’s is confident that AI demand is substantially exceeding supply.

However, the ratings agency said that huge capex increases were eroding the “historically strong free cash flow of these tech giants and prompting higher borrowing.

According to the report, 2027 would see a further $870 billion of capex, however, lack of readily available electricity will constrain AI capacity, lagging demand through 2027.

Moody’s also identified a widening gap between hyperscalers' and investors' opinions on these investments, with bond spreads widening and median equity prices declining.

“Hyperscalers perceive underinvestment in AI as an existential threat, while some investors worry that aggressive spending could lead to overbuilding and weaker returns,” the report said. “The large upfront capital spending required to meet AI demand is putting pressure on credit metrics. While debate about returns will likely persist, emerging revenue growth and backlog conversion trends should allay some concerns about these investments.”

The ratings agency said that, given the capital-intensive nature of AI and the requirement for upfront investment before revenue is realized, a data center will take between 12 and 24 months between initial spending and revenue generation.

The ratings agency also warned that higher capital intensity and debt levels for hyperscalers could lead to a “reassessment of creditworthiness” if profit growth fails to materialize.

But, Moody’s concluded that revenue growth has accelerated, despite these concerns, with median growth rates for Meta, AWS, Alphabet, Microsoft Azure, and Oracle increasing from 26 percent at the end of 2023 to 39 percent at the end of 2025.

“We expect revenue growth to accelerate further as more capacity comes online and for the third-party cloud services providers, contracted backlogs are converted into revenue,” the report said.