2 weeks ago
AI Investment Anxiety Lingers as Profits, Stocks Hit Records
Many big companies are spending enormous amounts of money to build computers and data centers to make artificial intelligence smarter.
Right now, these companies are making more money than ever, and the stock market is very happy about it.
But some very careful money watchers are getting nervous.
They worry that too much money is going into AI before anyone knows whether it will pay off.
Norway keeps its people's savings in a giant fund, and the person in charge says too much of it is now tied up in just a few technology companies that make computer chips.
The European Central Bank, which helps look after money in Europe, warns that very big technology booms like this one often end with stock prices falling sharply.
It says nobody can know exactly when that might happen.
Many companies also cannot yet say exactly how much money their AI plans will bring in.
So even though everything looks sunny, some adults think a storm might be coming.
Wall Street indexes returned to record highs after a blockbuster earnings season, with U.S. annual profit growth reaching 50% at midyear.
AI-related capital expenditure is heading above $1 trillion this year, and a Wall Street Journal report says hyperscaler spending may be $3 trillion higher than reported when off-balance-sheet items like purchase commitments are included.
Bond sales by Amazon, Alphabet, Microsoft, Meta Platforms and Oracle are estimated to double this year to $250 billion and nearly double again by 2027.
The European Central Bank warned a stock market correction is inevitable in technological booms even though its timing is unknowable, noting U.S. megacap shares are widely held by European households, insurers and pension funds.
Norway's $2.3 trillion sovereign fund posted a record $184 billion first-half profit, but chief Nicolai Tangen warned of unprecedented concentration, with 10 companies representing about 20% of the fund's value.
- Who
- Major AI-spending companies such as Amazon, Alphabet, Microsoft, Meta Platforms and Oracle, along with investors, the European Central Bank, Goldman Sachs and Nicolai Tangen of Norway's sovereign wealth fund.
- What
- Record corporate profits and capital spending tied to the AI boom are driving stock indexes to new highs, while economists and officials warn of overconcentration, heavy debt financing and a possible market correction.
- Where
- U.S. financial markets, with commentary from London-based Reuters, the European Central Bank and Norway's sovereign wealth fund.
- When
- This week, during the latest U.S. earnings season, following last week's soft U.S. inflation report and Monday's Wall Street Journal article on hyperscaler spending.
- Why
- Because AI investment has powered profits and spending to record levels, but analysts and officials worry about cash burn, concentration in a few megacap stocks, and an unproven payoff for the technology.
Optimistic Outlook
Cautious Outlook
Will AI spending pay off?
Optimistic Outlook
Profits and earnings estimates are at records, capital expenditure is above $1 trillion, and the AI investment engine is 'firing on all cylinders.'
Cautious Outlook
Cash burn at AI vanguard firms is growing and demands huge bond and equity financing, yet only 11% of S&P 500 management teams have quantified AI's impact on use cases and just 2% on earnings.
Is a stock correction coming?
Optimistic Outlook
Soft inflation removed fears of a Federal Reserve rate hike next month, and investors are acting as if 'all clouds have been banished' with indexes at record highs.
Cautious Outlook
The European Central Bank says a correction is inevitable in such technological revolutions, though its timing and extent are inherently 'unknowable.'
Stock market concentration
Optimistic Outlook
Large U.S. institutional investors only pulled back slightly from semiconductors, AI infrastructure and megacaps in the second quarter, suggesting markets are far from overconfidence.
Cautious Outlook
Nicolai Tangen says concentration in a few chip-heavy companies is unprecedented and that Norway's fund could lose its entire value if markets crash.
Key facts
- U.S. annual profit growth
- 50% at midyear
- Reported AI capital expenditure
- Heading above $1 trillion this year
- Potential off-balance-sheet hyperscaler spending
- Up to $3 trillion higher than reported (per Wall Street Journal)
- Hyperscaler bond sales estimate
- Doubling this year to $250 billion, nearly doubling again by 2027
- Norway sovereign fund size
- $2.3 trillion
- Norway fund first-half profit
- Record $184 billion
- Fund concentration
- 10 companies equal about 20% of the fund's value
- S&P 500 companies quantifying AI impact
- 11% on use cases, 2% on earnings; only 7% discussed AI expenses (Goldman Sachs)
Quotes
Nicolai Tangen
Chief executive of Norway's $2.3 trillion sovereign wealth fund
“"It's chips, chips, chips, chips, chips ... we've never seen such concentration before."”
livemint.com
“"I want to contribute to our mental emergency preparedness."”
livemint.com
European Central Bank researchers
Researchers at the European Central Bank
“"Historical experience suggests that technological revolutions carry risks of a boom‑bust cycle in asset prices, and this risk does not depend on today’s valuations being rational or irrational."”
livemint.com
Sources
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