A top strategist at Morgan Stanley says the ongoing AI investment tsunami is far stronger than previous tech booms due to one crucial factor.
In a new episode of the bank’s Thoughts on the Market podcast, Andrew Sheets, head of corporate credit research at Morgan Stanley, says the AI capital expenditure (CapEx) cycle is unlike past spending sprees that rattled markets.
While earlier eras of transformational technology triggered massive buildups of debt and overcapacity, Sheets says today’s AI buildout is largely financed by companies with fortress balance sheets and robust cash flow.
“Two things are true. AI-related investment will be one of the largest investment cycles of this generation. And there is a long history of major investment cycles causing major headaches to the credit market. From the railroads, to electrification, to the internet, to shale oil, there are a number of instances where heavy investment created credit weakness, even when the underlying technology was highly successful.”
He noted that this time is different because the firms leading the AI charge — cloud providers, chipmakers and hyperscalers — have unprecedented debt capacity.
“Unlike some other major recent capital expenditure cycles, be they the internet of the late 1990s or shale oil of the mid 2010s, both of which were challenging for credit, much of the spending that we’re seeing today on AI is backed by companies with extremely strong balance sheets and significant additional debt capacity. That just wasn’t the case with some of those other prior investment cycles and should help this one run for longer.”
Sheets acknowledges the historical pattern of over-investment that has followed nearly every major industrial revolution. Even so, he believes current market conditions do not show warning signs yet.
“So far, that’s not what we see. Data centers are still seeing strong underlying demand and are often backed by companies with exceptionally good resources. We need to watch if either of these change. But for now, we think the AI CapEx cycle has much further to go.”
Morgan Stanley’s stance echoes the sentiments of BlackRock CIO Rick Rieder. According to Rieder, AI is not in bubble territory as the largest US companies are generating unprecedented levels of cash that justify capital valuations.
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