A top Wells Fargo strategist says the biggest drivers of the AI boom now represent the most meaningful risk to the market, as spending pressures build for Big Tech platforms.
In a new CNBC interview, Wells Fargo’s Ohsung Kwon says the largest tech firms may be overstretching their financial capacity as they push to come out ahead of the AI race.
Kwon marks hyperscalers as the only bear case that could derail his bullish outlook for the market.
“I think it’s really the hyperscalers. That’s a little concerning because I think this AI CapEx cycle is still in the early innings. We think we’re in the fourth inning of the AI CapEx cycle. So still in the earlier part.
I suspect that this could continue for a little longer than what the market is predicting right now. I almost think this is like maintenance CapEx that companies have to invest in AI to stay competitive. This is not necessarily growth CapEx to increase their growth rate, but to stay competitive.”
He highlights a drastic drop in Big Tech’s free cash flow conversion, a metric that tracks a company’s ability to convert its operating profits into free cash flow.
“If you look at their free cash flow conversion versus earnings, it’s going to go down to 50%. It used to be at 100%. Their free cash flow margin is going to be at an all-time low. So those are some of the concerning signs for the hyperscalers, which are the biggest companies in the S&P 500.”
Kwon also says the AI CapEx cycle is not contributing much to the real economy, countering views that the massive spending is flowing money into other areas of the economy.
“But the way I describe the AI economy is EPS up, layoffs up. It’s great for the stock market. It’s great for corporates. It’s great for especially the big companies who have the access to capital to increase their productivity, but not so much for the real economy.”
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