AI investment risks ending in damaging bust as Big Tech spending hits $1 trillion, BIS warns

AI 'exuberance' risks ending in lengthy investment bust, BIS warns

Big Tech's AI spending spree risks ending in a damaging and lengthy "investment bust" that could rattle financial markets and damage the global economy, the Bank for International Settlements has warned. The Basel-based organisation, which advises the world's central banks, said the prospect of worse than expected returns in the tech sector could prompt investors to rapidly curb financing for AI companies, at a time when the five biggest "hyperscalers" are expected to invest more than $1tn from 2025 to the end of 2026. "Disappointment in returns could trigger a sudden pullback in financing and turn the capex [capital expenditure] boom into a protracted investment bust, with potential knock-on effects on financial conditions," the BIS said in its annual economic report on Sunday, as it laid out the risks of the "current AI exuberance". The warning comes amid mounting concerns over the scale of equity and debt issuance fuelling the AI revolution and the turbulence this is creating in global markets. Tech groups have flooded into the global credit market, raising hundreds of billions of dollars to fund AI projects, taking advantage of corporate credit spreads that are close to their lowest level this century. Record-high share prices have drawn them to the US equity market too, with SpaceX's blockbuster $86bn IPO earlier this month emblematic of roaring demand for stocks linked to the technology. Big investors have warned that this rush to issue debt could test investors' appetite, especially if the AI investment does not deliver an adequate return. Stock markets have been volatile since the SpaceX IPO and as investors digest growing expectations of interest rate increases by the Federal Reserve. Allianz's investment chief warned this week that SpaceX's decision to launch a $25bn bond sale so soon after its IPO was a sign that markets had entered "bubble territory". To date, optimism about AI has provided an important tailwind to global growth, the BIS added. The report acknowledged it was possible that AI could raise productivity "significantly" over the coming decade, given the efficiency gains it can provide to companies. But it said that historical episodes of investment booms provide "instructive parallels" -- among them the expansion of canals in the 1830s, railways in Britain in the 1840s and the dotcom boom of the late 1990s. These all had one key feature in common, said the BIS: "a genuine technological breakthrough that attracted capital in excess of what commercial returns could ultimately justify". It added: "These episodes ended with an eventual reversal in investment, inducing economy-wide recessions." A major equity market correction associated with AI could have broader implications today than in the past, the BIS added, because households have greater exposure to shares relative to their wealth and income. Financial stability could also be endangered, given the volumes of debt being sold by AI companies to finance their investment, it warned. While the global economy has demonstrated surprising resilience despite shocks including the US-Iran war, the economic repercussions of the near-closure of the Strait of Hormuz trade chokepoint have not fully run their course given continuing energy disruption, the BIS warned. Prior to the war, about a fifth of the world's oil and liquefied natural gas supplies were shipped through the waterway. "The inflationary impacts are already being felt and could prove persistent," the BIS said. "Perils have grown with pressure points around risks of persistent inflation, the sustainability of AI-related investments, growing financial vulnerabilities and weakening fiscal positions," it added. Data visualisation by Alan Smith in London

Americans Increasingly Alarmed About Tech Industry's Looming AI Bubble

Can't-miss innovations from the bleeding edge of science and tech From coast to coast, the people of the United States are growing resentful of AI. It's not hard to see why: they're constantly told the tech will take their jobs and leave them for broke, while the data centers used to train them hike up their utility bills and belch horrid fumes into their communities. Then there's the harrowing economics of AI, infinitely less tangible but impossible to ignore. With over $1 trillion shoveled into AI so far, it's increasingly difficult not to wonder: was it a good idea for one of the world's richest countries to go all-in on this stuff? Evidently, the public isn't so sure. A recent poll conducted by the news platform Haystack News found that the overwhelming majority of respondents are terrified about the threat of an AI bubble: the massive gap between AI spending and AI's actual return on investment. They're not wrong to be concerned. While financial analysts have long warned that the AI bubble could spell disaster for Wall Street and the tech industry overall, the mismatch between funds allocated and revenue generated has grown so large that some experts warn it could easily spark an economic meltdown. As the polling shows, everyday Americans are keenly aware of any potential ripple effects, with 55 percent of the over 4,100 respondents saying they're "very concerned" about a bubble in the AI industry. An additional 14.5 percent said they were "somewhat concerned," while a piddling 9.4 percent were "not very concerned." Bearish observers of the AI industry may have gotten their first taste of things to come on Tuesday, as a broad stock market scare wiped nearly $1 trillion in market value off the books. That sell-off was fueled by falling shares in AI-heavy companies like Amazon, Nvidia, Tesla, Alphabet, and Intel. Even Elon Musk's freshly-listed SpaceX briefly dipped below its IPO price of $150. Whether tech stocks continue to plummet in the short term is anyone's guess. Long term, it clearly doesn't take a Wall Street wiz to read the writing on the wall.

Big Tech is all in on AI. Now all they need is customers.

Aimee Picchi is the associate managing editor for CBS MoneyWatch, where she covers business and personal finance. She previously worked at Bloomberg News and has written for national news outlets including USA Today and Consumer Reports. This week's selloff in technology stocks underscores a gnawing anxiety among investors: What happens if you throw a big party and few people show up? The Nasdaq Composite Index has slipped nearly 3% this week as Wall Street frets over whether the trillions of dollars going into artificial intelligence will deliver the revenue and profit growth needed to justify that exorbitant cost. Goldman Sachs estimates tech companies will spend $7.6 trillion through 2031 to build thousands of new data centers to power the rise of AI. But fresh data is raising questions about whether enough consumers and businesses are willing to pay up for these services, even as the tech giants leading the AI charge borrow heavily to build the required infrastructure. "There's concern around how much hyperscalers are turning to debt markets in order to finance the infrastructure buildout," Kate Brennan, associate director of independent research institute AI Now, told CBS News, referring to the tech companies driving the torrent in AI capital spending -- Alphabet, Amazon, Meta, Microsoft and Oracle. She added, "The returns are not coming in, and the claims that are being made, in terms of efficiency or productivity numbers, are not netting out." Brennan also pointed to rising skepticism among some consumers and workers about the utility of AI. To be sure, Americans are increasingly using AI, but for now few appear willing to pay for it. That reluctance is coupled with what polls show are major public concerns with AI: 40% of adults think the technology will be a negative societal force over the next two decades, versus 16% who believe it will be positive, according to Pew Research. Meanwhile, more companies are laying off workers and investing in AI instead, heightening concerns about the technology's impact on jobs. For employers, the payoff is uncertain. A May study from tech research firm Gartner found that businesses that replace workers with AI agents often fail to generate a return on investment. One takeaway is that many consumers are using AI less out of a desire to chat with a bot than because there's simply no escaping the technology, Brennan said. Enter a search query on Google, and you'll get an AI response at the top of the page. Call a company's helpline, and chances are that you'll get an AI agent with a soothing voice accompanied by fake typing in the background. "The current push for AI adoption that we're seeing is directly coming from the financial incentives of AI firms," she added. Because of the massive capital expenditures, the hyperscalers and other AI firms are making a "deliberate push for AI everywhere -- no matter whether the demand is there or if customers want it or not." Bubble or bust? Wall Street has long worried about an AI bubble as companies like Alphabet and chipmaker Nvidia have repeatedly propelled the U.S. stock market to new records. To some investors, the current moment is analogous to the dotcom bubble of the late 1990s. While many of those early Internet high-flyers flamed out, the ones that survived -- think Amazon and Google -- eventually became profitable businesses or even household names. As with that earlier boom-and-bust cycle, the AI landscape is likely to yield uneven outcomes, according to Qian Wang, global head of capital market research at Vanguard, and senior global economist Kevin Khang. "Some firms may emerge as more profitable and with significant competitive advantages, while others could find their core businesses obsolete in a new AI economy," they said this week in a report. "As we continue to learn what the economics of AI look like in practice -- the trajectory of AI capital expenditure, how effectively hyperscalers can monetize AI investment, and the size and shape of AI's addressable market -- the market's sensitivity to the ups and downs is likely to be significant." They added, "Investors should expect a bumpy ride." The payback test A key question underlying the lofty valuations of the hyperscalers and other AI companies is whether their capital spending plans reflect realistic revenue forecasts, according to economist Ed Yardeni of Yardeni Research. Companies including Alphabet, Amazon, Meta and Microsoft are spending heavily on data centers and chips in expectation of strong demand for AI services, while large language model developers like OpenAI and Anthropic pay to use their data centers. Yet it remains to be seen whether consumers and businesses will ultimately generate enough revenue to justify those investments. "The AI ecosystem falls apart if the expected end-user demand for the AI/LLM products does not materialize or if prices for their offerings fall sharply below expectations," Yardeni said in a note to investors. Yardeni's team examined annualized revenue estimates for OpenAI and Anthropic to assess whether they're adding users fast enough to cover their spending commitments with the hyperscalers -- what he calls a "capex payback test" to check whether these companies can support the industry's capital expenditures. Their conclusion: Not right now, but the picture will improve in several years if current growth forecasts hold. "We find that the AI ecosystem is not fully end-user revenue-backed yet, but it is not entirely speculative either," Yardeni said. "Expected 2030 revenues make the math look much better. But those forecasts depend on a big assumption: AI revenues must continue to scale, and compute efficiency must improve, or both."