Investors Reassess AI Chip Stocks Amid Signs of Slowing Hyperscaler Spending

After a parabolic rally in artificial intelligence chipmakers, some investors are beginning to position for a slowdown in the massive spending by Big Tech that has fueled the sector's growth. This strategic shift reflects growing concerns about lofty valuations and the long-term sustainability of the current capital expenditure boom.

The Shifting Trade

For the past two years, a dominant market strategy involved buying semiconductor and AI infrastructure companies, betting that hyperscalers like Microsoft, Amazon, Alphabet, and Meta would continuously accelerate their spending. Now, some active managers are reversing this trade, cutting exposure to chip stocks and buying shares of the hyperscalers themselves, which have lagged the semiconductor rally.

According to a July fund manager survey from Bank of America, 82% of respondents viewed semiconductors as the most crowded trade. "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, a global equity portfolio manager at Edmond de Rothschild Asset Management, to Reuters. Bossard noted he has already reduced exposure to the sector.

Decelerating Growth on the Horizon

Forecasts suggest the pace of spending is set to moderate significantly. A UBS estimate cited by Reuters projects that hyperscaler capital expenditures (capex) will slow from the torrid pace seen recently.

• This year: Capex is estimated to rise 76% to $673 billion.
• Next year: Growth is forecast to slow to 25%.
• By 2028: The growth rate is expected to fall to just 6%.

This potential slowdown is compounded by financing pressures. As hyperscalers turn to debt markets to fund their AI buildouts, investor demand may be waning. Torsten Slok, Chief Economist at Apollo, noted that cover ratios—a measure of demand for corporate bonds—have fallen from nearly 5 times in February to below 2 times in July. This prompted the Bank for International Settlements to warn in June that a pullback in financing could turn the capex boom into a bust.

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Headwinds and Contrarian Views

Beyond financial constraints, other factors could stall spending growth. According to Empirical Research, about 70% of U.S. data center projects face some form of local opposition. In a notable development, New York recently imposed a one-year moratorium on the construction of large new data centers due to concerns over power and water resources.

Despite these headwinds, investor appetite for AI infrastructure remains high. Data from Morningstar shows that chip-focused funds attracted record net inflows of $10 billion through May. Madeleine Ronner, a senior portfolio manager at DWS, told Reuters she expects commentary from hyperscalers during earnings season to remain supportive of further investment, though DWS has taken some profits in the sector.

A Diversified Approach

Some market observers see the recent volatility as a natural correction within a larger tech boom. Jurrien Timmer, Director of Global Macro at Fidelity Investments, compared the recent pullbacks to periodic declines seen during the late-1990s internet rally. He argued that the underlying demand for computing capacity remains robust.

Even so, Timmer suggested investors should diversify beyond the companies building AI infrastructure to include those benefiting from its adoption, such as firms in the financial and healthcare sectors. "I want to participate in the boom, but I also want to protect myself in case that boom is overdone," he said.