AI spending nears a turning point... and investors are shifting their bets

The near-vertical rise in AI chip stocks has faced disruptions amid growing concerns over high valuations and the sustainability of massive revenues these companies are generating, while some investors have quietly begun repositioning themselves in anticipation of a slowdown in the spending boom, which is nearing a trillion dollars, and which could benefit the giant cloud computing companies that bear the cost of this spending.

For most of the past two years, the prevailing trend was the opposite; investors rushed into semiconductor and infrastructure stocks assuming that Microsoft, Amazon, Alphabet, and Meta would continue to accelerate their spending on building data centers.

Massive spending nears a slowdown phase

But this spending now appears poised to slow; UBS expects the capital expenditure of giant cloud computing companies to rise 76% this year to $673 billion, before its growth slows to 25% next year, and then to just 6% in 2028.

Some active portfolio managers have already begun reducing their exposure to chip stocks, while increasing investments in the shares of the giant cloud computing companies themselves, whose performance has lagged significantly behind the gains recorded by chip companies. They have also moved to buy software stocks and sectors expected to benefit from the adoption of AI technologies, such as finance and healthcare.

Alexis Bussar, global equity portfolio manager at Edmond de Rothschild Asset Management, who has already reduced his exposure to semiconductor stocks because he sees them as overpriced relative to expectations, said: "Once the giant cloud computing companies stop increasing their capital expenditure, it will be a breakthrough for these companies and a negative signal for the semiconductor industry."

Humanoid robots on display at the Ant Group booth during the World Artificial Intelligence Conference in Shanghai, China, July 17, 2026 (Reuters)

High valuations and risks of crowded trades

The Philadelphia Semiconductor Index, whose largest components include Nvidia, Broadcom, Micron, ASML, and TSMC, more than doubled over the past year, even after retreating about 18% from its peak in June, compared to an 11% rise in the equal-weight S&P 500, or gains of 8% in the European STOXX 600, which has limited exposure to AI.

The Bank of America fund manager survey for July showed that 82% of participants consider semiconductor stocks the most crowded trade in markets, while none reported taking short positions on the sector.

That raises the question of how investors would position themselves if AI spending remains strong but no longer accelerates at a pace sufficient to support the expectations embedded in AI infrastructure stock valuations.

Bussar has increased his investments in Amazon, and favors areas such as liquid cooling systems, cybersecurity, and selected software companies, adding: "We currently have very low exposure to the semiconductor sector."

Investor repositioning

Alberto Conca, chief investment officer at LFG+Zest, has sharply reduced his investments in memory chip manufacturers and chip-making equipment, while building investment positions in giant cloud computing companies and healthcare stocks, and supported this view by buying put options on a number of semiconductor stocks.

After the giant cloud computing companies financed the first phase of AI infrastructure buildout from their own cash flows, they have begun increasingly relying on external financing, raising questions about whether capital market pressures might ultimately constrain spending growth.

Bond markets detect signs of strain

The corporate bond market has absorbed billions of dollars in issuance from big tech companies this year, and investors, until recently, were snapping them up.

Apollo's chief economist, Torsten Slok, notes that coverage ratios, which measure demand for bonds relative to supply, fell to below two times in July, compared to about five times in February.

In June, the Bank for International Settlements, based in Basel, Switzerland, warned that any disappointment in returns could lead to a sudden withdrawal of funding, turning the capital expenditure boom into a prolonged downturn.

Conca said: "Cash flows are being almost entirely drained by capital expenditure," adding that giant cloud computing companies will become more disciplined in the pace of their spending growth.

In this context, Empirical Research points to a growing gap between the slowdown in capital expenditure growth on one hand, and the very high revenue expectations for chip companies and other AI infrastructure suppliers on the other, meaning that one side must change.

The firm said: "Either the capital expenditure trajectory of giant cloud computing companies will be revised upward again, or the expected revenue growth for their suppliers will have to come from other sources."

A person holds a child-like robot at the Fourier booth during the World Artificial Intelligence Conference in Shanghai (Reuters)

For her part, Madeline Runner, senior portfolio manager at DWS, expects that comments from giant cloud computing companies during the earnings season will remain supportive of continued investment. She said: "The surprise would be if it didn't." She added that institutional investors' expectations for 2027 spending are still much higher than analysts' estimates.

DWS has taken some profits on semiconductor stocks after their strong rally, but still maintains an above-average investment weight in the sector, and some of its funds have increased exposure to industrial and electrical equipment stocks after the recent pullback.

Regulatory hurdles threaten the pace of expansion

Rising local opposition to data centers in the United States could also slow spending growth. Empirical Research estimates that about 70% of data center projects face varying degrees of opposition.

New York State, on Tuesday, became the first US state to halt the construction of new large data centers, after imposing a temporary one-year moratorium, amid growing concerns that the facilities driving the AI boom are raising electricity costs, draining water resources, and increasing burdens on local communities.

Nevertheless, investor appetite for AI infrastructure remains strong; Morningstar data shows that chip-specific funds attracted a record net inflow of $10 billion through May.