The significant growth in cloud computing spending, which has fueled AI stock performance, is projected to decrease, with this deceleration anticipated to commence in the year 2026. Depreciation of data center assets is identified as a key reason for the expected cooling of capital spending. This trend could lead to a re-evaluation of valuation multiples for AI-related companies and potentially slow down revenue growth for those heavily reliant on cloud infrastructure spending.

Technology Sector Faces Scrutiny as Cloud Capital Expenditure Growth Forecasted to Moderate by 2026

Anticipating a Shift in Cloud Spending Dynamics

The robust growth in cloud computing spending, a primary catalyst for the recent ascent of AI stocks, is projected to undergo a significant deceleration, with this shift anticipated to commence in the year 2026. This anticipated cooling in capital expenditure is largely attributed to the evolving depreciation practices of major technology companies for their data center assets.

Deeper Dive: The Mechanics of Deceleration and Depreciation

Recent analyses, including those from UBS, highlight a projected slowdown in cloud infrastructure spending in the coming quarters, which could directly impact the financial performance of leading cloud service providers such as Microsoft (MSFT), Amazon (AMZN), and Google (GOOGL). While Amazon, with a market capitalization of $1.84 trillion and $120.47 billion in EBITDA over the last twelve months, continues to show strong analyst consensus, concerns are mounting that 2025 estimates for these cloud providers may be overly optimistic.

A key factor influencing this outlook is the strategic change in depreciation policies by hyperscalers. Companies including Amazon, Microsoft, Alphabet, and Meta have progressively extended the estimated useful lives of their data center assets, from an historical average of around three years to between four and six years. For instance, Amazon extended server depreciation from 3 to 4 years in 2020, and further to 5 years in 2021, also extending networking gear. This accounting adjustment mechanically lowers the hurdle rate required to achieve positive economic value, effectively smoothing earnings and protecting operating margins. Estimates suggest that extending the useful lives of data-center assets from 3 to 6 years could reduce collective data-center depreciation expenses from approximately US$39 billion to US$21 billion in 2024, and from US$51 billion to US$28 billion for 2025, assuming a guided US$300 billion in capital expenditure.

Despite an aggressive push in capital expenditure, with hyperscalers boosting spending by as much as 50% for AI datacenter infrastructure this year, research from Futuriom indicates a potential capital expenditure pullback of 20% to 30% in 2026. This projection is based on a reversion to historical norms where capital expenditure as a percentage of revenue for the five major hyperscalers typically ranged from 11% to 16%, contrasting with the over 22% expected for 2025.

Market Reaction and Valuation Implications

This anticipated long-term trend could necessitate a re-evaluation of valuation multiples for AI-related companies and potentially temper revenue growth for those heavily dependent on cloud infrastructure spending. The scrutiny on capital expenditures is intensifying, with warnings from analysts at Wells Fargo and TD Cowen about a "material" slowdown in AI-related infrastructure spending. Amazon shares have already experienced a decline of more than 20% from their February highs, and Microsoft has not reached a new peak since last July.

Joe Tigay, portfolio manager at Rational Equity Armor Fund, noted that a slowdown in cloud capex would “scream economic caution” and could negatively affect market valuations.

Broader Economic Context and Investment Rebalancing

The forecast for moderating cloud spending aligns with broader macroeconomic projections. Allianz Trade anticipates a deceleration in overall spending, with US consumption expected to slow further in 2026. The US economy's growth is projected to decrease from +2.3% in 2025 to +1.8% in 2026, partly due to impending fiscal consolidation. This economic environment suggests a more challenging landscape for corporate profitability and investor sentiment.

However, the commitment to AI infrastructure investment remains strong among major tech players. Companies like Oracle are strategically pivoting towards AI-driven cloud services, with significant capital expenditures planned to capture market share in the high-growth AI segment. Microsoft has projected $120 billion in capital expenditure for AI infrastructure in 2025, Amazon $100 billion, and Alphabet $85 billion, underscoring the industry's collective belief in AI's transformative potential.

Meanwhile, the Federal Reserve is considering interest rate cuts amid slowing economic growth. This prospect has historically been viewed positively by stock markets, with the S&P 500 reaching all-time highs following hints of potential rate adjustments.

Expert Perspectives

Analysts emphasize the need to "de-risk" Street estimates for cloud sector growth. Jefferies analyst Brent Thill, for example, adjusted Amazon's price target to $240 from $250 while maintaining a Buy rating, citing macroeconomic challenges and potential tariff impacts. Regarding the broader AI impact, Fahad Kamal, Chief Investment Officer at Coutts, provided insights:

"So far, the earnings benefits of AI have been relatively concentrated in a handful of large technology companies. Over the long term, however, deployment of AI across the economy will mean the impact is more widespread.”

Outlook: Navigating the AI Investment Landscape

In the coming days and weeks, market participants will closely monitor upcoming earnings calls from major cloud service providers, including Microsoft, Amazon, and Google. The ongoing dialogue surrounding the Federal Reserve's monetary policy and forthcoming economic reports will also be critical in shaping investor sentiment. While the immediate focus remains on infrastructure build-out, the long-term impact of AI is expected to stem from its broader deployment across various sectors, which may introduce volatility but also significant growth opportunities. The strategic realignment of capital towards AI infrastructure signals a sustained industry commitment, even as the growth trajectory of core cloud spending matures.