Wall Street Veteran Ed Yardeni Says an AI Slowdown Could Actually Extend the Boom
Key Takeaways
- •Alphabet's shares plunged about 12% on Thursday, their steepest single-day decline ever, after its third-quarter cash flow slipped further into negative territory.
- •Amazon, Alphabet, Meta, Microsoft, and Oracle are projected to pour nearly $800 billion into AI infrastructure this year, rising to about $1 trillion annually from 2027 through 2030.
- •Yardeni Research argues the AI boom's financial, physical, and political constraints could ultimately improve its durability, though weaker 'neocloud' providers face surging borrowing costs and may need to scale back.
- •Large-scale fundraising in the past week included SpaceX closing $40 billion in debt financing, Meta planning a $95 billion equity raise, and Microsoft selling $25 billion in bonds.
- •Oxford Economics says a slower AI build-out would ease inflationary pressures through the end of the decade and reduce the need for the Federal Reserve to keep monetary policy restrictive.
Equity markets endured another bruising week as investors questioned the durability of the AI boom, with a run of mixed quarterly earnings reports doing little to settle nerves.
The sharpest blow landed on Alphabet. The Google parent's cash flow sank deeper into negative territory in the third quarter, even as it joined Meta and Amazon in pressing ahead with massive spending plans. On Thursday, Alphabet shares fell about 12%, their worst day on record.
Elsewhere, the earnings picture was more encouraging. Microsoft reported strong cloud growth and stayed free cash flow positive, though it said its capital spending will accelerate, while AI chip giant SK Hynix — one of the world's largest memory chipmakers — crushed its earnings forecasts. And ahead of its IPO, Anthropic's S-1 filing, the disclosure document companies must file with U.S. regulators before going public, showed its cash flow turned positive in the first half of this year.
Some on Wall Street read the week as investors sorting AI winners from losers rather than giving up on the sector altogether — after numerous head-fakes in recent years that falsely signaled the boom was about to go bust.
According to Ed Yardeni, the veteran Wall Street strategist who leads independent research firm Yardeni Research, the AI investment boom now faces financial, physical, and political constraints.
The financial constraints are evident in investors' growing concerns over whether AI returns are enough to justify enormous capital expenditures, and in doubts about whether the supply of capital can meet all the demand from hyperscalers — the giant cloud-computing operators at the center of the build-out — he explained in a note on Monday. The past week alone underscored the scale of fundraising: Elon Musk said SpaceX closed $40 billion in debt financing, Meta announced plans to raise $95 billion in equity, and Microsoft raised $25 billion in a bond sale.
Meanwhile, data centers have run into physical constraints such as electricity shortages and limited grid capacity, while a growing political backlash against the facilities could slow the build-out.
If any of these constraints worsen, stocks could dive further — especially given that AI is now a major driver of corporate earnings and GDP growth, Yardeni warned. "However, we view these constraints as healthy for the durability of the AI boom!" he added.
Tighter capital, for instance, could force more efficient allocation of funding and lower the risk of overinvestment. Yardeni expects the hyperscalers to retain access to financing thanks to their strong balance sheets — and to keep spending. Amazon, Alphabet, Meta, Microsoft, and Oracle are projected to invest nearly $800 billion this year and $1 trillion annually from 2027 through 2030. AI companies with weaker balance sheets, such as the so-called neoclouds — upstart providers that rent out AI computing capacity — have seen their borrowing costs soar and may have to pull back.
In Yardeni's view, it all comes down to the U.S. economy, which he said has performed remarkably well over the past few decades. Even the midterm elections are unlikely to derail it, regardless of which party controls Congress. "Further AI jitters therefore could set up buying opportunities rather than signal the end of the boom," he said.
To be sure, a Democratic Congress could step up scrutiny of the AI sector and shape the debate around regulation, according to economists at Oxford Economics. But any federal AI legislation would unfold gradually, and a nationwide pause on new data center projects is unlikely, meaning state and local governments will exert greater influence over the build-out, they added. Given the geographic concentration of data centers, elections in Texas, the Southeast, and the Midwest will matter most.
Like Yardeni, Oxford sees upside in an AI slowdown. A less frantic build-out could ease stubbornly high inflation, as reduced demand for chips and other tech inputs gives consumers some relief on prices for gadgets.
"If the AI capex cycle runs hotter for longer, this component of inflation would prove stickier, keeping pressure on the Federal Reserve to keep monetary policy restrictive for longer," Oxford said Thursday. "However, a slower build-out would ease inflationary pressures through the end of the decade and relieve some of the upward pressure on long-term rates."
This story was originally featured on Fortune.com.
