Introduction
Last week, global investors drew support from optimistic reports of companies’ third-quarter financial performance and the trade agreement between China and the United States. However, other factors, such as the Federal Reserve’s restrictive stance on future interest rate cuts, could have been detractors. Despite these events, the stock market narrative remained unchanged, with indices hovering near their historical highs. The current enthusiasm surrounding artificial intelligence (AI) appears to be the primary driving force behind the market’s surge.
Market Indicators and Investor Confidence
Multiple signals suggest investors feel comfortable with the current market status. Volatility indicators in stock markets are near historical lows, and the debt market shows no signs of trouble, with interest rates pointing towards lower levels in a low-liquidity environment.
The dominance of the “Seven Majestic” companies in the stock market persists, even intensifying. This dominance, coupled with investor confidence, has kept indices near their all-time highs.
AI Investments: A Massive Surge
What’s truly captivating investors is the sheer volume of money that leading technology companies are announcing they will invest in AI-related projects. Meta, Microsoft, Alphabet, and Amazon alone have pledged to invest $450 billion next year. When including announcements from all S&P 500 companies, the total reaches $620 billion.
The pressing question is: how much capital will be needed to build the AI ecosystem, and how will it be financed? Historically, significant shifts—like the invention of electric lighting or the rise of the internet—have seen both excesses and shortages. Not every investment will be profitable.
Currently, most investments are being made using the companies’ own capital. However, there are signs that this may change.
Debt Market Activity
In September alone, technology-related companies raised $75 billion through investment-grade bonds in the debt market to fund data center construction. Oracle and Vantage, for example, secured a $38 billion syndicated loan.
The scale of these investments is noteworthy, as companies anticipate even larger amounts in the coming years than currently planned. This has raised eyebrows in the market.
Meta announced that its capital expenditure will be “notably higher” in the coming years, suggesting that future cash flow may not suffice. The use of Special Purpose Acquisition Companies (SPACs)—vehicles that raise money without going through a balance sheet—adds to the concern. Meta’s stock price dropped significantly following these announcements.
Economic Absorption and Market Adjustment
The AI investment figure surpasses the total annual fixed non-residential investment. The focus is solely on AI investments, leaving one to wonder if the economy (or economies) can absorb this growth. The profitability of this capital and its role in the AI-promised offerings will determine whether market adjustments occur or if attention shifts to more common variables.
For now, stocks appear impervious to news, driven by a narrow sector and few issuers. It’s challenging to envision such a shift in the remaining months of the year. Consequently, maintaining similar positions to the majority seems prudent—there appears to be no alternative.
About the Author
*Rodolfo Campuzano Meza is the General Director of INVEX Operadora de Fondos de Inversión.
