Jonathan Heathcote: Big tech is shifting to physical infrastructure investments, foreign capital is reshaping US asset valuations, and labor’s share of output is declining | Odd Lots

Tech giants' shift to infrastructure investment could reshape investor returns and market dynamics.

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Add us on Google by Editorial Team Apr. 11, 2026

Key takeaways

• Big tech companies are shifting their focus from generating cash to investing in physical infrastructure.
• This strategic shift may lead to changes in expected returns for investors in the tech sector.
• Foreign investments in US equity markets have significantly influenced the decline in the US net foreign asset position.
• The declining labor share of output is linked to rising firm valuations, affecting stock market behavior.
• Free cash flow provides a more stable measure of a firm’s value compared to price earnings ratios.
• Current market valuations based on free cash flow are not significantly overvalued compared to historical averages.
• Economic output distribution is shifting away from labor towards capital owners, impacting income distribution.
• Labor share in the corporate sector has declined significantly over the past few decades.
• The decline in labor share indicates a shift of income from workers to capital owners, raising policy concerns.
• Free cash flow remains a reliable measure of income available to firm owners, regardless of spending classification.
• The shift in tech investment strategies reflects broader changes in market dynamics and potential future returns.
• Understanding the relationship between foreign investments and US asset valuations is crucial for economic analysis.
• The changing dynamics in economic output distribution have significant implications for current economic trends.

Guest intro

Jonathan Heathcote is a monetary advisor in the Research Department of the Federal Reserve Bank of Minneapolis. He co-authored the paper “A Macroeconomic Perspective on Stock Market Valuation Ratios,” which analyzes how free cash flow and declining labor share explain elevated stock valuations. He previously served as an economist in the International Finance Division of the Federal Reserve Board of Governors from 2006 to 2008.

The shift in tech investment strategies

• Big tech is redirecting focus from cash generation to substantial investments in physical infrastructure.

• It does seem generally true that the big theme both with financials and tech is this incredible ability to generate huge returns with fairly modest capital outlays… but for much of the 2000s the investment was in sort of like tangible… and now we’re switching to really like brick and mortar.

  — Jonathan Heathcote

• This shift may alter the expected returns for investors accustomed to high returns from tech companies.

• The question is like okay they’re still making a ton of money… but can investors expect the same level of returns that they’ve seen in the past if there’s this big switch in terms of strategic decision making in terms of capital outlays?

  — Jonathan Heathcote

• Understanding historical tech investments helps contextualize this strategic shift.
• The implications for future returns are significant as tech companies prioritize physical infrastructure.
• This change reflects broader market dynamics and potential shifts in the tech sector’s investment landscape.
• Investors need to adjust expectations based on these evolving strategic decisions.

Foreign investments and US net foreign asset position

• The decline in the US net foreign asset position is influenced by foreign investments in US equity markets.

• We realized that the kind of international gross asset positions have gotten really big and a lot of the decline in the net foreign asset was driven by the fact that foreigners had invested a lot in us equity markets.

  — Jonathan Heathcote

• Understanding this relationship is crucial for analyzing US market valuations.
• Foreign investments have played a significant role in shaping the US’s economic landscape.
• This trend highlights the interconnectedness of global financial markets.
• The impact of foreign investments on asset valuations is a key consideration for economic policy.
• Analyzing these dynamics provides insights into the US’s financial health and market trends.
• The influence of foreign investments underscores the importance of international economic relations.

Labor share and firm valuations

• The declining labor share of output is linked to rising firm valuations.

• One thing macroeconomists have been talking about for a long time for example is the fact that it looks like labor share of output has been drifting down over time… that’s gonna drive up valuations.

  — Jonathan Heathcote

• Understanding this relationship helps explain stock market behavior.
• Rising firm valuations reflect broader macroeconomic trends and labor dynamics.
• The shift in labor share affects income distribution and economic growth.
• This trend has significant implications for stock market valuations and investor strategies.
• Analyzing labor share dynamics is crucial for understanding current economic trends.
• The connection between labor share and valuations highlights the importance of macroeconomic analysis.

Free cash flow as a valuation measure

• Free cash flow provides a more stable measure of a firm’s value compared to price earnings ratios.

• If you look at that ratio, the value of all the firms in the US relative to the total cash flow they’re generating… it doesn’t have like a long term drift… maybe prices are roughly where they… roughly within historical range compared to this ratio.

  — Jonathan Heathcote

• This measure is a reliable indicator of market valuation.
• Current market valuations based on free cash flow are not significantly overvalued compared to historical averages.

• If you look at where it was say in 1980… that ratio of value to free cash flow is the same… we’re not wildly overvalued today.

  — Jonathan Heathcote

• Free cash flow offers a stable perspective on corporate financial health.
• This metric is crucial for evaluating investment opportunities and market trends.
• Understanding free cash flow dynamics helps investors make informed decisions.

Economic output distribution dynamics

• The distribution of economic output is shifting away from labor towards capital owners.

• If you look at the price earnings ratio it’s not like earnings haven’t grown they’ve grown pretty fast and they’ve grown pretty fast because the share of the output that’s going to workers has been going down and the share that’s going to owners of firms has.

  — Jonathan Heathcote

• This shift impacts income distribution and economic growth.
• Analyzing these dynamics is crucial for understanding current economic trends.
• The implications for labor and capital distribution are significant for policy discussions.
• This trend highlights the importance of analyzing economic output distribution.
• Understanding these changes helps contextualize broader economic developments.
• The shift reflects broader changes in economic and market dynamics.

Decline in labor share and income distribution

• Labor share has declined significantly in the corporate sector over the past few decades.

• If you look at the corporate sector… those wages and salaries have fallen by about eight percentage points since 1980… that’s a big change.

  — Jonathan Heathcote

• This decline indicates a shift of income from workers to capital owners.

• There has been a big shift with less income going to labor more income going either to capital or just as pure rents to the owners of firms.

  — Jonathan Heathcote

• Understanding these trends is crucial for discussions on income inequality.
• The implications for economic policy and worker welfare are significant.
• This trend highlights the importance of analyzing income distribution dynamics.
• Analyzing labor share changes helps contextualize broader economic developments.

Free cash flow and corporate financial health

• Free cash flow is a reliable measure of income available to firm owners, regardless of spending classification.

• The free cash flow measure is gonna be the same either way so I think that’s a nice thing about free cash flow it is just a measure of the income that’s left over after the firm’s paid all its bills and it doesn’t really matter whether you count those bills as a as an input cost or a capital expenditure.

  — Jonathan Heathcote

• This metric is crucial for evaluating corporate performance and financial health.
• Understanding free cash flow dynamics helps investors make informed decisions.
• This measure provides stability amidst changing investment behaviors.
• Analyzing free cash flow is essential for understanding corporate financial trends.
• The significance of free cash flow highlights its importance as a financial metric.
• This insight provides clarity on evaluating corporate financial health amidst market changes.

Disclosure: This article was edited by Editorial Team. For more information on how we create and review content, see our Editorial Policy.