MW The AI marathon's biggest threat suggests the finish line is nowhere in sight

By Jules Rimmer

Returns are still outweighing financing costs

A surge in demand for AI infrastructure is fueling a boom in data centers, but the financing costs are still low enough to fuel it.

There's no sign of the AI bubble deflating yet and far from exhibiting signs of fatigue, the capital investment cycle continues its boom. The one thing that might bring the party to a halt is not apparent.

Will Denyer, the lead U.S. economist at Hong-Kong based Gavekal Research, emphasizes in a note published Thursday, the conditions necessary for the huge capex outlay planned by American corporates are still very much in place. Return on invested capital, or ROIC, still exceeds the weighted average cost of capital, or WACC, and this margin is known by analysts as the "Wicksellian Spread," named after the economist.

The Wicksellian spread is still wide, thereby supporting capex

The time to worry, Denyer observes, is when the spread falls below its twenty-year median, but at this stage it's still at least 70 basis points above that level.

"But who benefits from this spending boom?" is the question posed by Denyer. Denyer writes that U.S. capital spending on computers and peripherals, including data center components, surged to levels not witnessed since the dotcom era of 1998-2000. The difference this round, though, is that all of the equipment and hardwire fueling the boom - the graphics processing units, the memory chips, the power supply mechanisms - is imported.

The U.S. imports most of the equipment that goes into AI data centers

And that is what's responsible for the massive rally in Asian tech companies like Japan's SoftBank (JP:9984), Taiwan Semiconductor Manufacturing $(TSM)$ and South Korean memory chip companies SK Hynix and (KR:000660) Samsung Electronics (KR:005930).

As a result of these imports, Denyer notes that much of the capex bonanza is scarcely benefiting U.S. GDP. The direct impact on GDP is not as pronounced as many investors might imagine.

Denyer stresses that the indirect impact, however, really is significant, in the sense of the consumer wealth effect resulting from a stock-market rally, from the productivity and efficiency gains, and the developments in the U.S. power sector.

Scanning the horizon for threats to the AI capex cycle, Denyer cites a narrowing of the Wicksellian spread that could result from higher inflation and therefore higher interest rates if the Hormuz crisis sustains punitively high oil prices (BRN00). The other chief concern could be the constraints imposed on the AI infrastructure buildout by a shortage of electricity generation.

The U.S. Energy Information Administration does expect supply to fall short of demand for some time to come.

This persuades Denyer that investing in U.S. grid plays, natural gas companies, as well as solar and wind, is a sensible strategy right now.

"Fundamentals," Denyer concludes, "remain conducive to a continuation of the AI capex boom in the U.S. and is good news for tech and power plays. Momentum is also positive. Valuations are not compelling but nor are they as stretched as they were in early 2000," at the time of the dot-com bust.

A follow-up note from Denyer's colleague, Tan Kai Xian published Friday also added that while concerns have been rising at players like Meta $(META)$ and Oracle $(ORCL)$ as forecasts of AI capex in 2027 have now hit $1 trillion, the U.S has several sources of capital, as yet untapped.

First, there is $7.6 trillion parked in money market funds that could potentially be redirected towards AI if conditions were suitable. Second, banking deregulation in the U.S. is unlocking fresh, additional lending capacity with estimates as high as $2.6 trillion circulated by research firm Alvarez & Marsal.

Lastly, the U.S. government could channel funding into the AI sector as there is a bipartisan commitment to staying ahead of China in the race for superpower supremacy.

-Jules Rimmer

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May 08, 2026 04:57 ET (08:57 GMT)

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