AI Trade Has Entered ‘Kindness of Strangers’ Phase, Says One CIO

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Or sign-in if you have an account.(Bloomberg) — If investors are still harboring major worries about the disappearing cash flows at some Big Tech companies, you’d never know it by looking at the US stock market that’s once again trading near record highs.THIS CONTENT IS RESERVED FOR SUBSCRIBERS ONLYSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.SUBSCRIBE TO UNLOCK MORE ARTICLESSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.REGISTER / SIGN IN TO UNLOCK MORE ARTICLESCreate an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.THIS ARTICLE IS FREE TO READ REGISTER TO UNLOCK.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountAfter a short-lived selloff, shares of Google parent Alphabet Inc. are up more than 9% since the company reported negative quarterly cash flow for the first time as a public company on July 22. Meta Platforms Inc.’s shares are slightly higher than they were when the company reported its lowest free cash flow in almost four years on July 29, even as the company is projected to report negative cash flow for the remainder of the year. To Brad Conger, chief investment officer at Hirtle & Co., the reason investors are ignoring the sudden disappearance of what were once massive cash flows from some of the market’s leaders is a “reflexive assumption” that the situation is only temporary and the figures will turn positive again soon. Get the latest headlines, breaking news and columns.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Top Stories will soon be in your inbox.We encountered an issue signing you up. Please try again“I wonder if that is a comfortable delusion,” Conger wrote in the firm’s Investment Perspective for the second quarter. Conger believes the AI-focused companies that have gone from printing cash to raising money in debt markets are susceptible to becoming reliant on the “kindness of strangers,” a reference to Blanche DuBois’ last line in the Tennessee Williams play A Streetcar Named Desire. “You’re depending on somebody else’s willingness, and if you look at the spreads for hyperscalers, the spread over Treasuries their debt is commanding, it’s widening,” Conger said in an interview. This means “people are less certain of payback from these investments.”Global markets have absorbed roughly $570 billion of AI-related debt, much of it issued from the so-called hyperscalers — companies like Amazon.com Inc., Microsoft Corp. and Alphabet’s Google that are building data centers at an unprecedented scale. And they’re just getting started: Citadel Securities LLC is forecasting another $500 billion-plus of debt in the public and private markets by 2028 to bankroll the chips that go inside the artificial-intelligence campuses. That would be equal to more than 5% of the Bloomberg US high-grade index by 2028, according to Jeff Eason, head investment-grade desk analyst at the firm.Conger also pointed to a report last month by Nikkei, which calculated the combined off-balance-sheet obligations of five US hyperscalers at around $1.65 trillion.And while Alphabet and Meta have recovered from their post-earnings declines, Conger contends that is based on investors’ belief that cheaper Chinese AI models are creating demand for compute and that those with installed capacity available to meet it will be the winners. However, he views this as “dubious.”Unease around ballooning capital expenditures has been a key feature of the artificial-intelligence trade. After driving a selloff earlier in the year, the skepticism around spending plans has returned occasionally, causing various bouts of volatility that have proven to be short-lived. This advertisement has not loaded yet.This advertisement has not loaded yet, but your article continues below.The four largest players in the data center race have committed nearly $2.4 trillion in spending over the coming years. Alphabet, Meta, Microsoft and Amazon.com have each reported ballooning commitments on leases, buildings, energy and other equipment over the last year as they’ve rushed to build fleets of data centers. As Conger points out, all the investment in chips and equipment mean “the companies will face an escalating depreciation charge weighing on earnings for years to come.”Wells Fargo Investment Institute’s Sameer Samana notes that the market is continuing to “grapple with questions around the duration, pace, and sustainability of the AI buildout and also what the return on the buildout will look like.”Ultimately, the level of spending going toward AI is a “very valid question” every investor should ask, said Marta Norton, chief investment strategist at Empower. And in previous technological revolutions, companies that spent the most had not always been the ones to reap the benefits. Instead, it is broader society and the broader market.“And with that history as the backstory, I do think you really want to be thoughtful about that kind of spending,” said Norton.Notice for the Postmedia NetworkThis website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. Read more about cookies here. By continuing to use our site, you agree to our Terms of Use and Privacy Policy.