Credit Markets Flash Early Warnings for Tech Stocks
MICHAEL KRAMER AND THE CLIENTS OF MOTT CAPITAL OWN GOOGL, AMZN, MSFT, LONG-TERM.
You can access more daily content like this as a paying member of Navigating the Market.
Recent earnings data reveal that free cash flow trends in Big Tech are deteriorating, with Meta, Oracle, and Amazon leading declines due to surging AI-related capital expenditures. Rising credit default swap spreads and widening credit indices suggest that markets are reassessing risk across both investment-grade and high-yield credit, setting the stage for potential valuation compression in equities.
Fully Edited Transcript by ChatGPT
This week, I wanted to take a closer look at what’s been happening with some of the “Magnificent Seven” names—particularly Microsoft, Meta, and Oracle. Their stocks have fallen rather sharply over the past few weeks, and I wanted to show an example of fundamentals finally catching up to stock prices. Many investors tend to overlook this dynamic, believing that fundamentals don’t matter—until suddenly, they do.
The latest earnings season makes this point very clear. On a trailing twelve-month basis, free cash flow has completely rolled over for Meta and turned flat-out negative for Oracle. Amazon’s free cash flow has also declined. The only two major players still showing positive free cash flow growth over the trailing twelve months are Microsoft and Alphabet.
For full disclosure, I own Microsoft, Alphabet, and Amazon, though I’ve trimmed positions in both Microsoft and Alphabet over the past year. What’s important now is that this trend is expected to worsen—and even Microsoft and Alphabet’s strength may soon reverse. When we look ahead 18 months (not just the next 12), free cash flow estimates for all five companies have turned lower. In Oracle’s case, they’ve become even more negative. This is significant because it reflects a shift in how the market is beginning to price these stocks.
One key reason for this expected decline is the sharp rise in capital expenditures (CapEx). Companies like Amazon, Meta, Microsoft, and Alphabet—and even Oracle—are spending heavily on AI infrastructure, and those costs are expected to grow. This surge in CapEx is driving free cash flow estimates lower.
For years, the market treated these mega-cap tech names as being almost immune to economic cycles—able to generate cash and revenue independent of macro conditions. But that perception may be changing. Evidence of this shift can be seen in the credit markets, particularly in credit default swaps (CDS) for these companies.
Oracle’s CDS, for instance, has doubled from around 40 to 85 in just the past few weeks. Microsoft’s CDS has also risen, from roughly 13 to 26. While these are still low levels historically, it’s not the absolute number that matters—it’s the rate and direction of change. Amazon’s CDS has moved higher as well. Meta doesn’t have a CDS history available, likely due to data limitations, but the most recent figure sits near 41—higher than both Microsoft’s and Amazon’s. Alphabet’s CDS, trading around 29–30, has also been trending upward.
Even smaller AI-focused companies like CoreWeave show the same trend, with CDS levels above 500. These spreads vary by company, depending on debt levels and balance sheet structures, but the overall direction is clear: credit markets are rerating risk higher.
This rerating isn’t confined to tech. The broader investment-grade (IG) market is also showing widening spreads. The CDX IG Index, for instance, has begun to widen, signaling a broader repricing of credit risk. Though spreads remain historically tight, their direction points to a subtle but important shift.
This matters for equities because the S&P 500’s earnings yield tends to move with credit spreads—both in investment grade and high yield. If credit spreads widen, earnings yields rise, which typically leads to lower P/E multiples and weaker stock prices.
We can see this relationship clearly: Oracle’s stock has moved inversely to its CDS spread—the wider the CDS, the lower the stock. The same pattern appears in Microsoft and Amazon. If these CDS spreads continue to rise, equity prices could keep falling.
For broader confirmation, you can monitor ETFs like LQD for investment grade and HYG for high yield. Both have shown recent weakness. Additionally, ratios like SHY/HYG or SHY/LQD can provide insight into credit spread movements, and the LQD/SHY ratio has been trending higher—a sign of widening spreads.
Other free resources, such as the ICE BofA AAA U.S. Corporate Index Option-Adjusted Spread and the ICE BofA U.S. High Yield Index Spread, confirm similar trends. These widening spreads also tend to move in tandem with implied volatility, which has been rising as well.
In summary, fundamentals are beginning to matter again. Free cash flow is deteriorating, CapEx is rising, and credit spreads are signaling greater risk across the board. These factors together suggest that we may be in the early stages of a repricing for major tech names and the broader market.
Please remember to subscribe to the channel, like this video, and share it with your friends so we can continue to grow our community.
Defined Terms and Jargon by ChatGPT
Magnificent Seven (Mag 7): A term referring to seven leading U.S. tech and growth stocks—typically Apple, Microsoft, Alphabet (Google), Amazon, Meta, Nvidia, and Tesla.
Free Cash Flow (FCF): The cash a company generates after accounting for capital expenditures; a key measure of financial health and efficiency.
CapEx (Capital Expenditures): Funds used by a company to acquire, upgrade, or maintain physical assets such as data centers or AI infrastructure.
Credit Default Swap (CDS): A financial derivative that measures the cost of insuring against a company’s debt default; rising CDS spreads indicate higher perceived credit risk.
CDX IG Index: A benchmark credit index tracking credit default swaps for investment-grade corporate bonds.
Investment Grade (IG): Bonds or debt rated BBB- or higher, indicating lower credit risk.
High Yield (HY): Bonds rated below BBB-, often called “junk bonds,” indicating higher risk and higher potential return.
Earnings Yield: Inverse of the price-to-earnings (P/E) ratio, reflecting how much earnings a company generates per dollar of share price.
Multiple Compression: A decline in valuation multiples, such as the P/E ratio, often due to rising yields or risk perception.
Option-Adjusted Spread (OAS): A metric that adjusts credit spreads to account for embedded options in bonds, used to gauge relative credit risk.
LQD, HYG, SHY: ETFs tracking investment-grade corporate bonds (LQD), high-yield bonds (HYG), and short-term Treasuries (SHY).
Disclaimer
This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.