Firm Fed Positioning, Rotation Toward Defensive Positions, And Hacking Crypto

Market Commentary – November 2, 2026

Last week was quite eventful. First, the Federal Open Market Committee (FOMC) held its regularly scheduled policy meeting on Wednesday. Federal Reserve (Fed) Chair Kevin Warsh made it clear that the Fed is determined to bring inflation down from about 3% to its long-run target of 2% — yet the FOMC held interest rates steady, though they indicated a further tightening (raising of interest rates) in the months ahead.

Meanwhile, capital spending (capex) on artificial intelligence (AI) by Big Tech companies —the hyperscalers — came under scrutiny when several of those firms reported negative free cash flows (FCF). Plus a few notable technology companies missed expectations on their earnings reports. Investors again are questioning the spending and return on AI, and in the wake of the announcements, equities, particularly Technology, sold off sharply last week. Part of the reason the declines were so sharp was that hedge funds were leveraged and overweight in technology companies. The broader averages held up better as investors shifted into more defensive sectors such as Healthcare and Consumer Staples.

To top off the news events of the week, the crypto exchange Binance announced that it had been hacked for $6.3 billion in crypto. The volatility sent investors to seek safety in Treasuries, pushing yields lower.

AI CapEx Spending And Falling Free Cash Flow Scare Investors

Free cash flow (FCF) for the hyperscalers [Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOGL), and Meta (META)] has come under scrutiny as these firms have been borrowing billions to boost their compute capacity for AI. According to Gartner, worldwide AI spending is forecast to reach $2.7 trillion in 2026 (a 49.5% year-over-year increase) and is projected to climb to between $3.3 trillion to $3.64 trillion in 2027. Capital expenditure (capex) growth is expected to slow in coming quarters, but its rapid expansion over the past 2½ years has caused some of these hyperscalers to move to net negative free cash flow positions.

When FCF is negative, investors must ask when the returns from the investment will be realized and whether the capital is being allocated efficiently. The hyperscalers all carry substantial cash reserves and investment-grade credit ratings, meaning they can absorb negative FCF for extended periods without existential stress. Even so, negative FCF reduces buyback capacity, which has become an area of concern, supporting the companies’ stock prices. Most of the hyperscalers have active buyback
programs, and sustained negative FCF forces a choice between buybacks and capex. If capex wins, that removes a key source of earnings per share (EPS) support and stock price.

For the hyperscalers, net negative FCF is best understood as a forced bet: the companies believe the competitive cost of not investing in capex is higher than the financial cost of burning cash — you have to be in it to win or you will not be a major player in AI. Last week’s earnings reports— including Alphabet’s earnings miss, Amazon’s $77 billion capex quarter, and Intel’s earnings miss — caused investors to question whether the investment is sized correctly and whether the returns timeline is realistic.

We remain bullish on AI and believe it should still be a major driver of equity returns over the next few years. The sharp sell-off in Technology companies last week largely came from forced selling by hedge funds (or “fast money”) as they were highly leveraged into the investment space. We believe this is just a tactical move not based on the longer-term fundamentals.