Equity markets are currently experiencing a powerful surge driven by a singular idea: the urgent need to invest in artificial intelligence (AI) infrastructure. Nick Ferres, chief investment officer of Vantage Point Asset Management, terms this “short compute,” where perceived endless demand for AI capacity overshadows other investment considerations, leading to market euphoria. This sentiment recently propelled the S&P 500 to a record high, even as geopolitical tensions pushed Brent crude above US$100 a barrel, signalling a potentially worsening energy shock.
Investors justify this bullish outlook with robust earnings forecasts. US markets strategist Ed Yardeni explains this with his “Buzz Lightyear Theory” – analysts projecting earnings “to infinity and beyond.” The S&P 500 has soared 16.1 per cent since late March, with calendar year earnings growth estimates climbing to 21.4 per cent. This surpasses the 18.6 per cent peak during the 2000 dot-com bubble, an earlier illusory boom. A striking aspect of the AI boom is its circular demand. The five major hyperscalers — Microsoft, Meta, Oracle, Amazon, and Alphabet — are projected 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 fuels demand and revenues, but the largest users are often these same hyperscalers, alongside developers like OpenAI and Anthropic. They also hold significant equity investments in these private AI giants, booking revenue from their rising valuations.
While equity markets appear unconcerned, credit markets offer a different perspective. Nick Ferres notes tech companies are trading at wider credit spreads, indicating heightened risk perception. Lynda Schweitzer, co-head of global fixed income at funds management giant Loomis Sayles, highlights the influx of AI financing offers. While liquidity is currently abundant, Schweitzer questions whether the sheer volume of financing could eventually lead to “indigestion” and challenge the AI boom’s sustainability. This serves as a timely reminder that investment booms do not always conclude with a happy ending.
