- Hartnett prefers tech credit over tech stocks. Bank of America chief investment strategist Michael Hartnett, who has been cautious on stocks, wrote on Thursday that the better opportunity is in mega-cap tech bonds, advising investors to “buy tech bond ‘diamonds in-rough’” and calling Magnificent Seven bond yields of 6% to 8% attractive.
- AI borrowing has pushed yields higher. Concerns about the heavy debt behind the AI buildout have driven yields up, with even investment-grade hyperscalers now paying as much as 8%, according to Hartnett. Hyperscalers have issued about $271 billion in debt and equity so far this year.
- Cash flow is under pressure. Amazon held its capital spending plan at $220 billion and reported a trailing 12-month free cash flow outflow of $42.4 billion, while Alphabet posted negative free cash flow of $9.07 billion and guided capex to $195 billion to $205 billion. Alphabet fell nearly 13% on Thursday, its worst single-day drop on record.
- The funding mix is shifting. Microsoft plans a $25 billion bond sale and Meta plans to raise $95 billion through stock offerings, which Hartnett said heralds that the “era of big stock buybacks [is] over.”
What Happened?
Hartnett made the call in a note on Thursday as big tech stocks sold off after earnings. The Nasdaq fell more than 2% on Friday, led by a 29% drop in Intel and losses in Amazon, after the tech-heavy index had been up more than 12% for the year, according to CNBC. Hartnett said Meta’s equity raise signals new respect for credit investors, as companies turn to shareholders rather than only bondholders to fund AI spending.
Why It Matters?
For years, big tech used cash to buy back stock, which supported share prices. Now, with AI spending pushing free cash flow negative at some of the largest companies, they are borrowing heavily and even issuing shares. When a company raises equity instead of piling on more debt, its bondholders are better protected, which is why Hartnett sees higher-yielding tech bonds as a better risk-reward than the stocks. Mag 7 yields of 6% to 8% compare with a 4.933% yield on the 10-year Treasury on Friday, or roughly 1 to 3 percentage points more.
What’s Next?
Investors will watch how Microsoft’s $25 billion bond deal and Meta’s stock offerings are priced, and whether more hyperscalers follow with equity raises. Raymond James strategist Andrew Orton said he is “generally okay” with negative free cash flow as long as it is temporary and investment returns follow, so any sign of AI spending paying off could ease the pressure on both the bonds and the stocks.
