As investors remain uneasy about whether the enthusiasm for AI can continue after a series of mixed quarterly financial reports, the stock market has suffered another significant setback this week.
Alphabet In the third quarter, its cash flow further fell into negative territory, and this parent company of Google has also joined the ranks of Meta and Amazon in continuing to pursue large-scale spending plans. On Thursday, Alphabet's stock price dropped by about 12%, marking its largest single-day decline since its listing.
Meanwhile, Microsoft reported strong growth in its cloud business and continued to maintain a positive free cash flow, despite the company stating that capital expenditures will accelerate; AI The performance of SK Samsung Electronics, a chip giant, also far exceeded expectations. Before IPO, Anthropic's S-1 documents showed that its cash flow had turned positive in the first half of this year.
Some people on Wall Street believe that investors are distinguishing between the winners and losers of AI, rather than completely abandoning this sector. Over the past few years, there have been several misleading "false signals" in the market that suggested the AI craze was about to burst, but that did not turn out to be the case.
Market veteran Ed Yardeni ( Ed Yardeni ) stated that the AI investment boom is facing constraints in three areas: financial, physical, and political.
In a report on Monday, he explained that financial constraints are reflected in investors' growing concerns about whether the returns of AI are sufficient to justify such substantial capital expenditures, as well as concerns regarding whether the supply of capital is adequate to meet the full needs of the ultra-large cloud providers (hyperscalers).
In fact, just in the past week, Elon Musk stated that SpaceX has completed $40 billion in debt financing, Meta announced plans to raise $95 billion in equity financing, and Microsoft raised $25 billion through bond issuance.
At the same time, data centers also face physical constraints such as power shortages and limited grid capacity. Additionally, the growing political backlash surrounding data centers may also slow down construction progress.
Adni warned that if any of these constraints further deteriorate, the stock market could see additional declines, especially considering that AI has now become an important driver of corporate profits and GDP growth.
However, he added, "Nevertheless, we believe that these constraints are healthy for the sustainability of the AI craze!"
For example, if the supply of capital is no longer as smooth as it used to be, it may lead to more efficient allocation of capital, thereby reducing the risk of over-investment. As for Adni himself, he expects that large-scale cloud providers will still be able to obtain financing due to their strong balance sheets and will continue to increase their spending.
This is because Amazon, Alphabet, Meta, Microsoft, and Oracle are expected to invest a total of nearly $800 billion this year, and will invest $1 trillion per year between 2027 and 2030. However, for companies with weaker balance sheets, such as the so-called neoclouds, borrowing costs have soared, and they may have to cut back on expenditures.
But in Adney's view, everything ultimately depends on the U.S. economy. He said that over the past few decades, the U.S. economy has performed exceptionally well. Even midterm elections are unlikely to disrupt this situation, regardless of which political party controls Congress.
"Therefore, further AI concerns may actually create buying opportunities, rather than signifying the end of this wave of enthusiasm," he said.
However, economists from the Oxford Institute for Economics ( Oxford Economics ) stated that if the Democrats control Congress, there may be increased scrutiny of the AI industry, which could affect discussions surrounding regulation.
But they added that any AI legislation at the federal level will proceed slowly, and the likelihood of a nationwide suspension of new data center projects is not high. This means that state and local governments will have a greater influence on the construction process.
Given the geographically concentrated distribution of data centers, the elections in Texas, the southeastern and central-western regions of the United States are of utmost importance. However, similar to Adni, Oxford also believes that there are certain positive aspects to the slowdown of AI.
A slowdown in construction pace could alleviate stubborn high inflation due to reduced demand for chip and other technology investments, and provide consumers with some relief in the prices of technology products.
Oxford said on Thursday: "If the capital expenditure cycle of AI continues to overheat for a longer period, this component of inflation will become more persistent, increasing the pressure on the Federal Reserve to maintain a tight monetary policy for an extended time. However, a slowdown in construction will ease inflationary pressures by the end of this decade and reduce the upward pressure on long-term interest rates."
