The stock market is currently experiencing a powerful rally driven by a singular idea: the need for urgent investment in artificial intelligence (AI) infrastructure. Nick Ferres, chief investment officer at Vantage Point Asset Management, calls the perceived unending demand for AI capabilities, overshadowing other investment considerations and leading to market euphoria, “short computing.” Geopolitical tensions have pushed Brent oil prices above US$100 per barrel, a trend that recently pushed the S&P 500 to record highs, even as the energy shock appears likely to worsen.
Investors justify this bullish outlook with solid earnings expectations. U.S. market strategist Ed Yardeni explains this with the “Buzz Lightyear theory,” in which analysts predict profits “to infinity and beyond.” The S&P 500 index has soared 16.1% since late March, and calendar year earnings growth expectations have risen to 21.4%. This is higher than the peak of 18.6% during the previous dot-com bubble in 2000. A notable aspect of the AI boom is its cyclical demand. The five largest hyperscalers (Microsoft, Meta, Oracle, Amazon, and Alphabet) are expected to spend US$805 billion (A$1.1 trillion) on AI infrastructure. These companies are major providers of cloud computing services and digital infrastructure. This drives demand and revenue, but the biggest users are often the same hyperscalers, alongside developers like OpenAI and Anthropic. They also have significant equity investments in these private AI giants, securing returns from rising valuations.
While the stock market appears indifferent, the credit market offers a different perspective. Nick Ferres points out that tech companies are trading at wider credit spreads, indicating increased risk awareness. Linda Schweitzer, co-head of global fixed income at fund management giant Loomis Sayles, says she’s been flooded with offers for AI financing. Although liquidity is currently plentiful, Schweitzer wonders whether the sheer amount of funding could eventually lead to “indigestion” and challenge the sustainability of the AI boom. This is a timely reminder that investment booms don’t always have happy endings.
