- $500 billion AI financing deal involving Nvidia and private equity stirs much comment but not the share price
- Bulls assert the deal will underpin demand for AI ‘compute’ (hardware and infrastructure)
- Sceptics point out it is merely a memorandum of understanding and potentially a bad sign that the biggest buyers cannot afford compute on their own
- Vendor financing was one warning signal of trouble ahead during the tech, media, and telecoms (TMT) bubble of 1998-2000
- Investors might like to keep a checklist of other classic features of markets when they may be a lot nearer a top than a bottom
“Nvidia and its private equity partners are trumpeting a $500 billion financing deal to fund artificial intelligence (AI) infrastructure, but for once the silicon chip design giant’s share price is just shrugging,” says AJ Bell investment director Russ Mould.
“This may reflect the open nature of the funding agreement, which is clearly described in Nvidia’s statement as a ‘memorandum of understanding,’ rather than a done deal; or ongoing concern over how the biggest buyers of compute and chips cannot afford their investment and need external help to pay for it; or bad memories of how financing of customer purchases fed and then felled the tech, media and telecoms (TMT) bubble of the late 1990s.
“There is a lot at stake here, from the point of view of both financial markets and the wider economy.
“The monumental spending plans of the so-called AI hyperscalers are driving demand not just for silicon chips, but for power generation equipment, water and cooling systems, cabling, real estate, servers, earth-moving equipment, air cargo capacity and more besides.
“Hyperscaler targeted capital spending of $845 billion across Alphabet, Amazon, Meta, Microsoft, and Oracle alone equates to around 2.5% of US GDP, and that is before any multiplier effects and potential benefits to US consumer confidence and spending of a booming stock market are factored in.
Source: Company accounts, Marketscreener, analysts’ consensus forecasts for Alphabet, Amazon, Meta Platforms, Microsoft and Oracle
“The rub is that two of the biggest buyers of the silicon chips and data centres are OpenAI and Anthropic, neither of which makes a profit. Nor are they expected to do so for many years to come, something which in itself may explain why talk of them floating on the US stock market is a lot quieter than in June, when SpaceX was preparing its launch on Nasdaq.
“It is hard to see how it is a good thing that two pivotal companies cannot afford to buy what they need and are reliant upon external funding to do so, including from the suppliers of the very kit they require, especially when the date at which they will move into the black and generate positive cash flow seems to be some way off.
“This does not seem to be deterring financial markets, judging by how the Magnificent Seven of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla have a combined stock market capitalisation of $23.4 trillion. That is some 35% of the S&P 500 and more than the GDP of China, with its 1.4 billion inhabitants.
“The idea is also that AI drives long-term growth thanks to productivity gains, although questions over the expense of developing and using the services remain. The technology must prove that energy, water and mineral resource restraints do not mean the cost of usage offsets the benefits, which could include lower wage bills and smaller, if more efficient, workforces.
“Sceptics will counter by raising fears about levels of malinvestment to match the Japanese property bubble of the 1980s, the global internet bubble of the 1990s and US real estate boom of the early 2000s – and this remains a risk.
Source: LSEG Refinitiv data
“An investment bust to match those could have deleterious consequences for the real economy as well as the financial one, where any downturn could play to the naysayers’ fears that a bubble is forming.
Source: LSEG Refinitiv data
“After all, 15 of the world’s 20 largest companies by stock market capitalisation worldwide are technology companies with exposure to AI spending. Their total current valuation is $39.1 trillion, or a fifth more than US annual GDP estimates for 2026.
Source: LSEG Refinitiv data, Marketscreener
“Such a skew does seem reminiscent of prior episodes where one industry, sector or group of companies fired investors’ imaginations and came to dominate sentiment and stock market indices as a result. Others include the ‘onics and ‘tronics stocks of the late 1960s in the US; America’s ‘Nifty Fifty’ in the early 1970s; technology, media, and telecom stocks worldwide in the late 1990s; and residential real estate and mortgage-lending specialists in the early 2000s.
Source: LSEG Refinitiv data
“Bearing in mind legendary, if now retired, investor Warren Buffett’s aphorism that, ‘Rising prices are a narcotic that affects the reasoning power, up and down the line,’ investors might like to follow a checklist of prior stock market booms where one key sector or concept led the charge, and the signs that helped to call the top – at least with the benefit of hindsight.
“The more ticks there are, the closer we may be to the top. Classic developments in the late stages of an equity bull market – and especially a bubble – can include:
- Stock indices that are heavily skewed toward a select band of strongly performing or in-favour companies or sectors.
- Companies changing their name so they can jump on the hot-sector bandwagon.
- Looser accounting standards and greater acceptance of companies’ own preferred profit metrics and ‘EBBS’ (earnings before bad stuff).
- A lowering of the accepted standards of corporate governance and executive conduct in the pursuit of profit.
- A rash of new stock market initial public offerings (IPOs) and then follow-on share sales by management or early-stage backers in (often loss-making) companies.
- Stock splits.
- Brokers and bankers using increasingly inventive valuation methodologies to justify current share prices and further increases in them.
- Launches by, and leaps in assets under management at, new investment funds or products which specialise in fashionable market areas.
- Advertising during media coverage of major global events is dominated by a particular hot and fashionable industry or group of companies.
- Financial markets move from the middle-to-back sections of newspapers and websites and up to the front.”
