Wall Street looks past Fed pause to tech earnings and AI rebound

In the rapidly evolving world of AI investment, two recent deals by Apollo reveal the challenges Wall Street faces in allocating capital effectively. Apollo's acquisition of a stake in Abu Dhabi's government-backed asset manager, Mubadala Capital, indicates that the primary issue for Wall Street is not a shortage of capital, but rather a lack of suitable investment opportunities. With $1 billion entering its retirement fund each week, Apollo's internal origination engine struggles to keep up with the demand.

Apollo's decision to invest in Mubadala gives it priority access to a consistent flow of deals. On the other hand, Apollo's $40 billion chip lease to SpaceX highlights the opposite problem. Initially, SpaceX's financing appeared reasonably priced, with a spread of about 3.5 percentage points over a US Treasury rate. However, by the time the deal closed, the spread had widened to 3.95 points, making it significantly more expensive for SpaceX, a company with an investment-grade rating.

The rising costs of AI investment point to a growing awareness among capital providers of the inherent risks associated with the AI trade. A Wall Street executive notes that while some may have been naive in their initial approach, they have quickly become more cautious. "I won't say they were dumb until four weeks ago, but..." the executive said, acknowledging that the risks are now more apparent.

Goldman Sachs CEO David Solomon echoed these concerns in a recent call with analysts, emphasizing that no one knows how the demands for capital and compute will evolve as the broader AI ecosystem matures. "While we are proud of the privileged position we play in the AI investment cycle," he stated, "that will only become clearer as technology and markets continue to develop."