Michael Cembalest of JPMorgan is not waving the bubble flag on AI, but he is clear about one thing: when one theme has “smothered” the rest of the US equity market, it should be stress-tested.
The numbers alone justify some unease. The market capitalisation of four hyperscalers (Microsoft, Alphabet, Amazon, and Meta) and the semiconductor ecosystem they depend on has surged from roughly $3 trillion to $18 trillion in a few years.
Since ChatGPT’s launch in November 2022, says Cembalest, a group of just 42 AI-linked companies has generated an estimated 65-75 per cent of the S&P 500’s returns, profits and capital spending. Strip them out, and US indices would have lagged Europe, Japan and even China.
Tech capital spending alone has accounted for almost half of US GDP growth over the past three quarters, up from less than 5 per cent in the first three quarters of 2023.
Cembalest’s question is not whether AI is transformative, but whether the “largest moat in market history” is as “indestructible” as the market assumes. He highlights four medium-term risks.
These include already straining US power generation, with data centres projected to drive two-thirds of load growth.
There is the obvious risk from China, which is pouring subsidies into building a parallel semiconductor ecosystem. Geopolitical conflict involving China and Taiwan is another. The world remains hugely dependent on Taiwan for advanced chips, a concentration risk that dwarfs Europe’s former reliance on Russian gas.
The most immediate risk, however, is a potential “metaverse moment” for hyperscalers. Since late 2022, the big four have spent $1.3 trillion on capex and R&D, much of it AI-related. Will profits materialise at scale? “If not, moat companies could face a version of the metaverse reckoning that took place in 2022”, cautions Cembalest, when Meta’s vast spending spooked investors, and “the Mag7 stocks fell in half.”
For what it’s worth, Cembalest reckons stocks will rise again in 2026, but “it’s the right time to start focusing on these questions”.
