Cash That's Free?
The Holy Grail
🚨🚨 New Fed Paper drop: A Macroeconomic Perspective on Stock Market Valuation Ratios
It’s fine, we don’t have to pretend like you’re going to read that. I will summarize it for you instead in two sentences:
The stock market doesn't price earnings. It prices free cash flow.
The findings basically go like this:
The stock market has been steadily reducing the premium they pay for profits (known as “Earnings Yield”)
Instead, investors have been steady in how they price free cash flow — holding stable around 3.6% for seventy years.
The last 40 year boom in the markets can be explained by one thing: a rising share of corporate profit flowing to owners as free cash flow, driven largely by declining labor’s share of value added.
What is Free Cash Flow
FCF = Operating Cash Flow − Capital Expenditures
Free Cash Flow is basically the amount of profit a business has leftover after subtracting out CapEx.
Basically, FCF is the money left over that a business can use to enrich it’s investors.
These days, this is mostly done in the form of dividends, share buybacks, or building a cash war chest.
Why This Matters
Investors award free cash flow.
But in the last 3 years, FCF yield has dropped sharply, from ~3.6% to ~2.4%.
That decline is explained almost entirely by massive AI infrastructure spending.
For the first time in decades the tech mega caps are converting free cash flow back into CapEx at enormous scale.
Put differently, the tech companies are finally investing.
For years, these have been some of history’s most efficient businesses, kicking piles of cash off year in, year out.
But for the first time, really since the early 2000’s, they are forgoing cash now in favor of investment.
The very big question: will the market be patient enough to wait for future cash flows at the expense of today’s. That’s a high-stakes bet.
Originally published on Griff’s Substack on 17 April 2026.