Banking titan Morgan Stanley warns that the AI investment wave that has driven one of the most powerful equity rallies in US history may be entering its late phase.
The bank warns that the surge in capital spending on artificial intelligence — now the dominant driver of US equity performance — is showing signs of fatigue.
The long-term equity bull market, which has lifted the S&P 500 by nearly 90% in just three years, is increasingly reliant on a handful of technology giants and hyperscale data-center operators.
“Given the market dominance of the ‘Magnificent 7’ tech giants and other companies in the data center ecosystem, Morgan Stanley’s Global Investment Committee believes the durability of this nearly three-year-old bull market rests, more than anything, on the current surge in capital spending on artificial intelligence.”
Morgan Stanley says the AI boom is entering what it calls the “seventh inning” — a warning that growth could slow as spending outpaces returns and speculative deal-making accelerates.
“We see cause for concern, suggesting the AI capex boom—and, thus, the equity boom—may be closer to the seventh inning than the first or second.”
The bank points to several red flags, starting with cash flow deterioration among the biggest AI players. Free- cash-flow growth at the major cloud-computing providers — including Amazon, Microsoft, and Google — has turned negative.
“As the race for computing power accelerates, this key financial metric has turned decidedly negative for these companies, with some estimates suggesting it could shrink around 16% over the next 12 months. When free cash flow growth for the market’s most highly valued companies slows or turns negative, valuations come into question, and investors tend to become more cautious.”
The firm also warns that the growth engines funding generative AI — search, advertising, and cloud services — are slowing amid saturation and price competition. At the same time, deal-making is turning increasingly speculative.
“The latest deal-making in generative AI smacks of speculation on unprofitable technologies and schemes that call to mind the ‘vendor-financing’ strategies of past eras.”
Against that backdrop, the bank’s Global Investment Committee is advising clients to turn defensive. It recommends selling small-cap and unprofitable tech stocks, trimming meme-stock exposure, while urging investors to consider high-quality large caps, real assets, and fixed income.
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