Editor’s Note: Editor’s Note: The story has been refreshed with the latest market price action and a revised headline.
J.P. Morgan Asset Management’s Bill Eigen is growing increasingly cautious about the financial architecture underpinning the artificial intelligence boom, warning that investors should watch the pace of AI growth, spending and valuations rather than simply their headline levels.
Watching The ‘Second Derivative,’ Not Just Growth
Speaking on CNBC, Eigen said most investors are focused on AI revenue levels and growth rates, but he’s more concerned with the rate of acceleration of that growth, what he called the “second derivative.”
“What I’m terrified of is when that starts to slow,” Eigen said, adding that capital expenditure and private market valuations of AI labs already appear to be decelerating.
Hyperscaler capex is projected to reach roughly 3.1% of U.S. GDP by 2027, according to Apollo Global Management chief economist Torsten Slok, more than twice the roughly 1.2% peak reached during the telecom boom.
A ‘Duration Mismatch’ Worries Him On Data Center Debt
Eigen said he’s wary of buying long-dated debt tied to data centers, given the mismatch between 30-year bond terms and the three-to-six-year depreciation cycle of the chips inside them.
Much of the future financial obligation sits outside reported debt, with Goldman Sachs estimating roughly $1.5 trillion in aggregate hyperscaler lease commitments, including Meta Platform Inc.‘s (NASDAQ:META) $27 billion Hyperion joint venture with Blue Owl, structured to keep debt off Meta’s own books.
Eigen said credit spreads across public markets remain near historic tights, but pointed to credit default swaps on AI-related companies, including Nvidia Corp. (NASDAQ:NVDA), which have begun to widen, a warning sign he said isn’t yet showing up in headline valuations.
According to a Wall Street Journal report, Alphabet Inc. (NASDAQ:GOOGL) (NASDAQ:GOOG), Amazon.com, Inc. (NASDAQ:AMZN), Meta, and Microsoft Corp. (NASDAQ:MSFT) have racked up $3 trillion in commitments off their balance sheets.
Betting Against the Trade, But He’s Not Buying Either
Eigen said he isn’t shorting AI-related assets, since it’s impossible to know when a cycle like this will end, but he’s also not buying at current prices.
He pointed to roughly $2 trillion in remaining performance obligations reported by major hyperscalers, reflecting contracted future revenue from customers.
“How’s that going to get paid?” Eigen added.
The SPDR S&P 500 ETF Trust (NYSE:SPY) and Invesco QQQ Trust ETF (NASDAQ:QQQ), which track the S&P 500 and Nasdaq 100, respectively, were lower in premarket on Tuesday. The SPY was down 0.45% at $769.19, while the QQQ declined by 1.24% to $720.80.
Benzinga edge rankings indicate Nvidia’s stock has a Momentum score in the 69th percentile and a Growth score in the 99th percentile.
Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
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