Chris Wood, Global Head of Equity Strategy at Jefferies, raised concerns over the sustainability of the current trend in AI investments, warning of a potential implosion due to a shift towards debt financing and the risk of a funding break.
Wood, in an interview with CNBC-TV18 on Thursday, expressed apprehension about the “enormous” amounts being invested in AI by American hyperscalers, with an estimated trillion dollars expected next year.
According to him, these investments may not yield returns that justify the capital deployed. “My base case there’ll be massive loss of capital destruction in the U.S.,” he said.
However, as long as the market doesn’t question the capex “aggressively,” semiconductor stocks will continue to profit, he said.
The Equity Head also pointed out a shift in the funding model. Initially, these investments were primarily cash-funded. Now, three and a half years into the trend, debt is increasingly financing these investments.
Wood cautioned that a market decision to withdraw credit could trigger a swift end to this trend. While there is no clear timeline for this scenario, he emphasized the importance of monitoring the situation closely.
“You could get some news item that suddenly makes people question this whole cycle,” he cautioned.
The Jeffries Equity Head stated that the key macroeconomic issue for stock markets right now is the outlook for AI capital expenditure.
Hyperscaler AI Spending Nears $1.2 Trillion
Last month, Economist Torsten Slok said U.S. hyperscaler AI capital spending could reach 3.1% of GDP in 2027. That means today’s AI capex race could become almost three times larger relative to the economy. Hyperscalers are expected to spend about $916 billion over the next 12 months, rising to nearly $1.2 trillion the following year.
Current consensus estimates indicate that six U.S. hyperscalers — Amazon.com Inc. (NASDAQ:AMZN), Alphabet Inc. (NASDAQ:GOOGL), Microsoft Corp., Meta Platforms Inc. (NASDAQ:META), Oracle Corp. (NYSE:ORCL), and Space Exploration Technologies Corp. (NASDAQ:SPCX) could collectively spend roughly $916 billion over the next 12 months, with spending projected to rise to approximately $1.17 trillion over the following year.
Despite calls for an AI slowdown, sustained infrastructure spending by big tech could lead to its continued growth, according to Hendi Susanto, a portfolio manager at Gabelli Funds. Even if leading AI labs such as Anthropic and OpenAI decelerate their progress, "second- and third-tier players" will seize the chance to level up, maintaining high demand for AI infrastructure, according to the tech fund manager.
Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
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