Analysis-Among AI crowd, some investors position for slower hyperscaler spending growth

How is hyperscaler capital expenditure growth expected to change?

What factors could constrain future AI infrastructure spending?

For most of the past two years, the opposite trade prevailed: investors piled into semiconductor and infrastructure companies on the assumption that Microsoft , Amazon, Alphabet and Meta would keep accelerating spending on the buildout of data centers.

But that spending now looks set to slow, with UBS estimating hyperscalers' capex will rise 76% this year to $673 billion, but will increase by only 25% next year and just 6% in 2028.

Some active managers have already cut their exposure to chip stocks and are adding shares of hyperscalers themselves, which have sharply lagged the rally in chipmakers. They are also buying into software stocks and sectors expected to benefit from AI adoption, such as financials and healthcare.

"Once they stop increasing their capex, it will definitely be a relief for hyperscalers and a negative signal for the semi industry," said Alexis Bossard, global equity portfolio manager at Edmond de Rothschild Asset Management, who has already cut exposure to semiconductor stocks, which he believes have become too expensive relative to expectations.

The Philadelphia Semiconductor Index, whose top holdings include Nvidia, Broadcom, Micron, ASML and TSMC, has more than doubled over the past year, even with a near-18% drop from its June peak, compared with an 11% rise in the equal-weighted S&P 500, or an 8% gain in Europe's AI-light STOXX 600.

Bank of America's July fund manager survey found 82% viewed semiconductors as the most crowded trade and none reported being short the sector.

The question arises over how to position if AI spending remains strong, but no longer accelerates fast enough to support the expectations embedded across the AI infrastructure trade.

Bossard has increased exposure to Amazon and favours areas such as liquid cooling, cybersecurity and selected software firms. "We have a massive underexposure to semis right now."

LFG+ZEST CIO Alberto Conca has sharply cut positions in memory-chip and equipment makers, while building positions in hyperscalers and healthcare stocks, and has backed that view by buying put options on selected semiconductor names.

After funding the initial AI buildout through their own cash, hyperscalers are increasingly turning to external financing, prompting questions over whether capital-market pressures may eventually constrain spending growth.

The corporate debt market has absorbed billions in Big Tech issuance this year and investors have, until recently, lapped it up.

Apollo Chief Economist Torsten Slok notes that cover ratios, a measure of investor demand for the bonds on offer relative to supply, have fallen to below 2 times in July, from nearly 5 times in February.

In June, the Basel-based Bank for International Settlements warned disappointment in returns could trigger a sudden pullback in financing and turn the capex boom into a protracted bust.

"Cash flow is starting to be almost completely drained by capex," Conca said, arguing hyperscalers will become more disciplined on spending growth.

Against that backdrop, Empirical Research highlights a growing mismatch between moderating capex growth and lofty revenue expectations for chipmakers and other suppliers of AI infrastructure, implying that something will have to give.