AI Boom Faces Headwinds from Global Trade Tensions and Economic Uncertainty

AI boom under threat from tariffs, global economic turmoil

April 23 (Reuters) - Corporate America's artificial intelligence investment frenzy has shrugged off fears of slow returns and doubts fueled by AI models built cheaply by China's DeepSeek. But a global trade war started by the Trump administration threatens to stall the boom across industries from energy to software. Upcoming earnings reports from tech giants including Alphabet (GOOGL.O), opens new tab and Microsoft (MSFT.O), opens new tab, as well as utilities that power massive data centers such as Vistra (VST.N), opens new tab and Constellation Energy , will show whether tit-for-tat tariffs between the U.S. and China are forcing businesses to rethink their ambitious infrastructure plans. Their clients, which range from retailers and media houses to airlines and automakers, are slowing spending amid the uncertainty. Analysts said this could hit investments in AI tools and pointed to early signs of tech giants pulling back on data center leases. Pre-emptively, both Alphabet's Google and Microsoft have reaffirmed their capital expense plans for the year that together total $155 billion - nearly half the roughly $320 billion analysts estimate Big Tech will pour into AI this year. However, the pressure is mounting on tech companies as tariffs disrupt supply chains, especially in China. The world's No. 2 economy is crucial to the production of AI hardware and was excluded from a 90-day tariff reprieve earlier this month. Analysts say the 145% U.S. tariffs on Chinese goods will sharply increase data center costs if an exemption on electronics is rolled back. "Much of the electrical infrastructure and data center equipment is manufactured outside of the U.S. In many cases this equipment is in short supply and demand is high globally," said Pat Lynch, executive managing director for data center solutions at CBRE, a commercial real estate services firm. "Tariffs will likely make this more challenging, especially if foreign suppliers divert this equipment to other markets." A pullback in AI spending has big implications for the U.S. economy. J.P. Morgan analysts estimated in January that spending on data centers could contribute between 10 and 20 basis points to the country's economic growth in 2025-2026. Some of the concern is already baked into shares of the "Magnificent Seven" - a group of high-flying stocks that have powered the market in recent years but have lost around $5 trillion in market value since hitting a peak late last year. AI chip giant Nvidia (NVDA.O), opens new tab, whose blistering stock rally over the past two years briefly turned it into the world's most valuable firm, is down about 26% this year. Alphabet stock has lost about 20% of its value. LONG GAME There have been signs that companies are slowing their data center build-up. TD Cowen analysts said last month that Microsoft had abandoned projects set to use 2 gigawatts of electricity in the U.S. and Europe in the last six months due to an oversupply. A senior Microsoft executive said earlier this month that the company might adjust the pace of its plans, but it would continue to grow capacity wherever there was demand. "Planning is a multi-year and capital-intensive program ... any significant new endeavor at this size and scale requires agility and refinement as we learn and grow with our customers. What this means is that we are slowing or pausing some early-stage projects," the executive said in a LinkedIn post, opens new tab. On Monday, Wells Fargo analysts said Amazon.com AMZN.O had delayed some commitments around new data center leases - a move the company said reflected routine capacity management and no changes to its expansion plans. "It does appear like the hyperscalers (big cloud firms) are being more discerning with leasing large clusters of power," the analysts wrote in a note. Microsoft is set to post its slowest revenue growth in seven quarters, according to data compiled by LSEG. Growth at Azure, the Microsoft business best-positioned to benefit from AI, is set to hit a more than one-year low, Visible Alpha data showed. Alphabet, Amazon and Apple are also expected to report slower growth, even as a weaker dollar provides some support. Still, some investors and analysts say the long-term promise of AI justifies continued spending, even if short-term returns are slow - an argument commonly offered by tech executives. Earlier this month, Amazon CEO Andy Jassy defended his company's AI investments, saying it was necessary to remain competitive in the race to dominate the technology. "The market has massively discounted the near-term spending for AI and it is wrong," said private equity firm Patriarch Organization's CEO, Eric Schiffer, who has increased his exposure to the "Magnificent Seven" in the past few months. "The large tech players cannot afford to lose the AI race. I think you will start seeing more substantial returns from hyperscalers in one year to 18 months." Reporting by Aditya Soni in Bengaluru; Editing by Sayantani Ghosh and Anil D'Silva Our Standards: The Thomson Reuters Trust Principles., opens new tab Suggested Topics:Artificial Intelligence

AI boom under threat from tariffs, global economic turmoil

Pre-emptively, both Alphabet's Google and Microsoft have reaffirmed their capital expense plans for the year that together total $155 billion - nearly half the roughly $320 billion analysts estimate Big Tech will pour into AI this year. However, the pressure is mounting on tech companies as tariffs disrupt supply chains, especially in China. Corporate America's artificial intelligence investment frenzy has shrugged off fears of slow returns and doubts fueled by AI models built cheaply by China's DeepSeek. But a global trade war started by the Trump administration threatens to stall the boom across industries from energy to software. Upcoming earnings reports from tech giants including Alphabet and Microsoft, as well as utilities that power massive data centers such as Vistra and Constellation Energy, will show whether tit-for-tat tariffs between the U.S. and China are forcing businesses to rethink their ambitious infrastructure plans. Their clients, which range from retailers and media houses to airlines and automakers, are slowing spending amid the uncertainty. Analysts said this could hit investments in AI tools and pointed to early signs of tech giants pulling back on data center leases. Pre-emptively, both Alphabet's Google and Microsoft have reaffirmed their capital expense plans for the year that together total $155 billion - nearly half the roughly $320 billion analysts estimate Big Tech will pour into AI this year. However, the pressure is mounting on tech companies as tariffs disrupt supply chains, especially in China. The world's No. 2 economy is crucial to the production of AI hardware and was excluded from a 90-day tariff reprieve earlier this month. Analysts say the 145% US tariffs on Chinese goods will sharply increase data center costs if an exemption on electronics is rolled back. "Much of the electrical infrastructure and data center equipment is manufactured outside of the U.S. In many cases this equipment is in short supply and demand is high globally," said Pat Lynch, executive managing director for data center solutions at CBRE, a commercial real estate services firm. "Tariffs will likely make this more challenging, especially if foreign suppliers divert this equipment to other markets." A pullback in AI spending has big implications for the U.S. economy. J.P. Morgan analysts estimated in January that spending on data centers could contribute between 10 and 20 basis points to the country's economic growth in 2025-2026. Some of the concern is already baked into shares of the "Magnificent Seven" - a group of high-flying stocks that have powered the market in recent years but have lost around $5 trillion in market value since hitting a peak late last year. AI chip giant Nvidia, whose blistering stock rally over the past two years briefly turned it into the world's most valuable firm, is down about 26% this year. Alphabet stock has lost about 20% of its value. Long game There have been signs that companies are slowing their data center build-up. TD Cowen analysts said last month that Microsoft had abandoned projects set to use 2 gigawatts of electricity in the U.S. and Europe in the last six months due to an oversupply. A senior Microsoft executive said earlier this month that the company might adjust the pace of its plans, but it would continue to grow capacity wherever there was demand. "Planning is a multi-year and capital-intensive program ... any significant new endeavor at this size and scale requires agility and refinement as we learn and grow with our customers. What this means is that we are slowing or pausing some early-stage projects," the executive said in a LinkedIn post. On Monday, Wells Fargo analysts said Amazon.com had delayed some commitments around new data center leases - a move the company said reflected routine capacity management and no changes to its expansion plans. "It does appear like the hyperscalers (big cloud firms) are being more discerning with leasing large clusters of power," the analysts wrote in a note. Microsoft is set to post its slowest revenue growth in seven quarters, according to data compiled by LSEG. Growth at Azure, the Microsoft business best-positioned to benefit from AI, is set to hit a more than one-year low, Visible Alpha data showed. Alphabet, Amazon and Apple are also expected to report slower growth, even as a weaker dollar provides some support. Still, some investors and analysts say the long-term promise of AI justifies continued spending, even if short-term returns are slow - an argument commonly offered by tech executives. Earlier this month, Amazon CEO Andy Jassy defended his company's AI investments, saying it was necessary to remain competitive in the race to dominate the technology. "The market has massively discounted the near-term spending for AI and it is wrong," said private equity firm Patriarch Organization's CEO, Eric Schiffer, who has increased his exposure to the "Magnificent Seven" in the past few months. "The large tech players cannot afford to lose the AI race. I think you will start seeing more substantial returns from hyperscalers in one year to 18 months."

Microsoft and Amazon capex in focus amid potential AI pullback

When the two biggest players in cloud computing report earnings this week, the amount the companies are spending will be just as interesting to investors as how much they are making. Ahead of results from Microsoft Corp. on Wednesday, and Amazon.com Inc. on Thursday, there have been reports suggesting that both companies may be cutting back on their spending on artificial intelligence infrastructure. That puts a spotlight on the capital expenditures announced in the latest earnings, which will offer insight into the outlook for AI demand and the broader consequences that might have for the economy. "A slowdown in cloud computing or capex would scream economic caution and speak to recession fears in corporate America," said Joe Tigay, portfolio manager of the Rational Equity Armor Fund. "Any cutback in growth is hurtful to valuations, and would be damaging to the overall market. While multiples have come down a lot, we're not drastically cheap by any historical measure. If we are on a recessionary path, multiples will get a lot lower." Both Microsoft and Amazon have declined this year, largely tracking the market lower as tariff risks have amplified concerns about economic growth. Amazon is more than 20% off a February peak, while Microsoft hasn't hit an all-time high since July. The four biggest spenders on AI infrastructure -- Alphabet Inc. and Meta Platforms Inc., along with Microsoft and Amazon -- are expected to spend more than US$300 billion in their current fiscal years. The money plowed into AI-related investments had led to soaring stock gains in companies like Nvidia Corp., Super Micro Computer Inc., and Arista Networks Inc. Recently, though, Microsoft and Amazon have been at the centre of a shift in expectations around industry spending. Bloomberg News reported that Microsoft has pulled back on data centre projects around the world, with some of the pause coming abruptly. TD Cowen analyst Michael Elias last week wrote that channel checks "indicate material MSFT equipment order cancellations" for data centre supplies with a "long-lead time." Separately, Wells Fargo Securities wrote that Amazon's web services business is pausing some data centre leases, although Kevin Miller, vice president of global data centers at Amazon Web Services, later wrote that there "haven't been any recent fundamental changes in our expansion plans," and that it continues to see "strong demand for both Generative AI and foundational workloads on AWS." Alibaba Group Holding Ltd. Chairman Joe Tsai had warned in March of a "bubble" in data center construction. The emergence of the Chinese AI startup DeepSeek scrambled forecasts for future spending after the newcomer claimed performance that was comparable to U.S. models despite costing less and requiring fewer chips. Investors are also increasingly looking for the AI investments to translate to growth in a more pronounced fashion. Ned Davis Research closed its overweight recommendation on AI stocks last week, writing that the downturn in the group can continue, especially with the new risks created by the Trump administration's trade war. "Higher policy uncertainty often leads to lower capex spending. We see no reason data centre capex spending would be excluded," wrote Pat Tschosik, the firm's chief thematic strategist. He added that "AI spending is seen as discretionary and, just as companies pull back on capex in an economic downturn, they pull back on AI application development as well." Alphabet Inc. reported capex of $17.2 billion last quarter, slightly more than had been expected. It plans to spend $75 billion on capex this year. The Google parent also posted better-than-expected operating profits for its Google Cloud business, even as sales slightly missed the analyst consensus. The company said there was more customer demand than company capacity for the cloud business, echoing comments made by all three cloud giants last quarter. Microsoft results are expected to show net earnings growth of 9.7% and revenue growth near 11%. Amazon's revenue is seen rising 8.2% with net earnings soaring almost 40%. Both are expected to grow consistently in the coming years, a key reason why Wall Street is nearly uniformly positive on them. For both names, more than 90% of the analysts tracked by Bloomberg recommend buying the shares. Jim Worden, chief investment officer of Wealth Consulting Group, is among those who retains a positive view on the pair. "I don't think we'll see big reductions in capex, though there will likely be some discussion about being more efficient and how to best spend the money," he said. "Uncertainty is still really really high, but we've barely touched the surface for AI demand and use cases, so investors need to be patient and play the long game."

AI boom under threat from tariffs, global economic turmoil

(Reuters) - Corporate America's artificial intelligence investment frenzy has shrugged off fears of slow returns and doubts fueled by AI models built cheaply by China's DeepSeek. But a global trade war started by the Trump administration threatens to stall the boom across industries from energy to software. Upcoming earnings reports from tech giants including Alphabet and Microsoft, as well as utilities that power massive data centers such as Vistra and Constellation Energy, will show whether tit-for-tat tariffs between the U.S. and China are forcing businesses to rethink their ambitious infrastructure plans. Their clients, which range from retailers and media houses to airlines and automakers, are slowing spending amid the uncertainty. Analysts said this could hit investments in AI tools and pointed to early signs of tech giants pulling back on data center leases. Pre-emptively, both Alphabet's Google and Microsoft have reaffirmed their capital expense plans for the year that together total $155 billion - nearly half the roughly $320 billion analysts estimate Big Tech will pour into AI this year. However, the pressure is mounting on tech companies as tariffs disrupt supply chains, especially in China. The world's No. 2 economy is crucial to the production of AI hardware and was excluded from a 90-day tariff reprieve earlier this month. Analysts say the 145% U.S. tariffs on Chinese goods will sharply increase data center costs if an exemption on electronics is rolled back. "Much of the electrical infrastructure and data center equipment is manufactured outside of the U.S. In many cases this equipment is in short supply and demand is high globally," said Pat Lynch, executive managing director for data center solutions at CBRE, a commercial real estate services firm. "Tariffs will likely make this more challenging, especially if foreign suppliers divert this equipment to other markets." A pullback in AI spending has big implications for the U.S. economy. J.P. Morgan analysts estimated in January that spending on data centers could contribute between 10 and 20 basis points to the country's economic growth in 2025-2026. Some of the concern is already baked into shares of the "Magnificent Seven" - a group of high-flying stocks that have powered the market in recent years but have lost around $5 trillion in market value since hitting a peak late last year. AI chip giant Nvidia, whose blistering stock rally over the past two years briefly turned it into the world's most valuable firm, is down about 26% this year. Alphabet stock has lost about 20% of its value. LONG GAME There have been signs that companies are slowing their data center build-up. TD Cowen analysts said last month that Microsoft had abandoned projects set to use 2 gigawatts of electricity in the U.S. and Europe in the last six months due to an oversupply. A senior Microsoft executive said earlier this month that the company might adjust the pace of its plans, but it would continue to grow capacity wherever there was demand. "Planning is a multi-year and capital-intensive program ... any significant new endeavor at this size and scale requires agility and refinement as we learn and grow with our customers. What this means is that we are slowing or pausing some early-stage projects," the executive said in a LinkedIn post. On Monday, Wells Fargo analysts said Amazon.com had delayed some commitments around new data center leases - a move the company said reflected routine capacity management and no changes to its expansion plans. "It does appear like the hyperscalers (big cloud firms) are being more discerning with leasing large clusters of power," the analysts wrote in a note. Microsoft is set to post its slowest revenue growth in seven quarters, according to data compiled by LSEG. Growth at Azure, the Microsoft business best-positioned to benefit from AI, is set to hit a more than one-year low, Visible Alpha data showed. Alphabet, Amazon and Apple are also expected to report slower growth, even as a weaker dollar provides some support. Still, some investors and analysts say the long-term promise of AI justifies continued spending, even if short-term returns are slow - an argument commonly offered by tech executives. Earlier this month, Amazon CEO Andy Jassy defended his company's AI investments, saying it was necessary to remain competitive in the race to dominate the technology. "The market has massively discounted the near-term spending for AI and it is wrong," said private equity firm Patriarch Organization's CEO, Eric Schiffer, who has increased his exposure to the "Magnificent Seven" in the past few months. "The large tech players cannot afford to lose the AI race. I think you will start seeing more substantial returns from hyperscalers in one year to 18 months." (Reporting by Aditya Soni in Bengaluru; Editing by Sayantani Ghosh and Anil D'Silva)