Nomura: Hyperscalers Become "Funding Shorts," Dragging Down U.S. Stocks
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Nomura strategist Charlie McElligott argues that hyperscalers — down 16.4% since late May — have flipped from the market's favorite AI proxy into its primary source of funding pressure, and that this, not rate hikes or recession pricing, is why US equities can't make new highs.
Why can't US stocks break higher?
McElligott pins the problem not on Fed hikes or recession fears, but on hyperscalers — Google, Amazon, Meta, Microsoft — turning into the market's "funding short."
This means → without these megacaps leading, US equities have lost the engine for new highs and are "cannibalizing themselves."
The data: the hyperscaler basket is down 16.4% since late May and has not outperformed the S&P 500 equal-weight index since October 2025.
How did hyperscalers flip from darlings to ATMs?
The turning point came in Q4 2025, when the market began reassessing the AI trade's logic.
Before that, massive capex signaled bullish AI conviction. Now it signals cash burn, accelerating debt issuance, and the risk of large-scale equity dilution. In plain terms = spending used to be the bullish case; now spending *is* the bearish case.
This reflects a fundamental shift: AI Trade 1.0 rewarded "who spends the most"; AI Trade 2.0 asks "who earns it back."
Is the buyback safety net unraveling too?
For fifteen years, mega-cap buybacks paired with minimal issuance acted as a shock absorber — a latent bid on dips that suppressed volatility like synthetic long gamma.
But the Magnificent Seven alone account for 20%–30% of total market buybacks. If issuance rises and buybacks shrink, the shock absorber reverses into a headwind.
This means → the fifteen-year "buyback floor" could flip from a virtuous cycle into a supply-overwhelms-demand vicious cycle.
So who is actually making money?
With hyperscaler capex floodgates wide open, upstream "AI enablers" — semiconductors, memory, optical networking, servers, power infrastructure — are front-loading revenue and profit.
McElligott's "bottleneck basket" has rallied 60.9% since the March 30 market bounce.
In plain terms = hyperscalers are burning cash to fight over scarce supply, and the supply chain is cashing the checks first.
Can this extreme divergence last?
McElligott warns that the stretched long-short positioning is building reversal risk.
Stress signals are mounting: Microsoft's subtle "hesitation" on open-ended capex last November, Apple and Microsoft announcing major price hikes this week, Micron posting an 85% gross margin on surging memory demand, and reports that OpenAI may delay its IPO to 2027.
This means → hyperscaler CFOs will face mounting pressure from falling share prices and restive shareholders to rethink the "capex space race" — the inflection point hinges on who hits the brakes first.
Content is for reference only, not financial advice.