AI investment cycle may have peaked, Jefferies warns

A Jefferies report warns that the global AI investment cycle may have reached its peak or could be entering a mid-cycle correction. Rising financing costs and doubts about the returns on substantial capital expenditure are expected to impact technology investments in the upcoming year, according to the financial advisory firm. The report suggests that the reluctance of financial markets to fund AI-related investments is raising questions about the sustainability of spending by major US technology companies.

The four leading hyperscalers - Microsoft, Amazon, Alphabet, and Meta - collectively increased their capital expenditure by 108 percent year-on-year to a total of USD 202 billion in the third quarter of 2026. However, concerns over financing and profitability may cause AI-related capital expenditure in 2027 to fall short of current market expectations.

The report states that AI-related investment accounted for 1.39 percentage points, or 67 percent, of the US real GDP growth of 2.1 percent in the four quarters leading up to the third quarter of 2026. The report also notes that higher borrowing costs for technology companies, with bond yield spreads widening and credit default swap spreads of Oracle and CoreWeave rising sharply, could result in a slowdown in AI spending that negatively impacts US economic growth.

It may prompt a shift in Federal Reserve policy expectations from monetary tightening towards easing. To diversify their portfolios, Jefferies recommends exploring opportunities outside the AI supply chain, specifically in healthcare and biotechnology, where AI applications in drug development could significantly contribute to growth.

The investment firm increases India's weight in its Asia-Pacific ex-Japan relative-return portfolio by two percentage points to 14 percent, maintaining an Overweight stance. However, it reduces allocations to South Korea and Taiwan by one percentage point each, maintaining Underweight positions in both markets.