AI: just one big trade – Michael Roberts Blog

Skip to content

Goldman Sachs, the mega investment bank, reckons that AI is just “one big trade on the US economy”. And the AI investment bubble is getting even larger. In the last week, the AI model maker, Anthropic, announced that it was issuing shares to potential investors in what is called in stock market jargon, an Initial Public Offering (IPO). Anthropic was following Elon Musk’s Space X planned IPO of a humungous $1.8trn. This would value SpaceX in the market at 92 times its annual revenue!

Alphabet, Google’s parent, also plans to raise $85bn in equity funding — its first stock offering in more than two decades. Together, these three giant IPOs could command a combined valuation of around $4trn. That’s one-third of all the value of US IPOs since 1980 (inflation-adjusted)! And yet SpaceX, OpenAI and Anthropic are all currently loss-making and the commercial potential of AI models and, in the case of Space X in going to Mars, remains unknown.

AI is one big trade for the US stock market investors and one big bet on the US economy. That’s because the amount of capital investment being made by the companies called the ‘hyperscalers’ into AI models, data centres and other AI equipment is staggering. As a share of US GDP, it is now set to far surpass the 19th-century railroad build-out.

Back in December 1996, then Federal Reserve chair Alan Greenspan characterised the boom in technology, media and telecom stocks as showing signs of “irrational exuberance”. Almost 30 years later, we can say the same about the AI boom with bells on. This investment boom is already much larger than the dot.com internet investment of the late 1990s ever was. In 2025, US businesses invested almost $1.5trn in IT equipment and software. At the peak of the dot.com bubble, it was $466bn, or $829bn when adjusted for inflation. The hyperscalers Microsoft, Alphabet, Amazon, Meta and Oracle plan to invest hundreds of billions in the next five years in data centres to provide the computing power to run these AI models. Capital investments are expected to rise by 20 per cent a year, a growth rate never seen before in this industry.

US GDP growth is now driven almost exclusively by rising tech spending. If this starts to drop, the US economy will enter recession very quickly — even if tech investments decline only by a little bit, say 4 to 6 per cent, as happened after much smaller tech booms in the 1960s and during the 2009 recession.

As I showed in my last post, US corporate profits have risen significantly. But according to Brian Green in a recent post, around 80% of the increase in US non-financial corporate profits came from Nvidia and hyperscalers. The stock market is increasingly concentrated in a handful of AI‑linked stocks, which now account for roughly 40 per cent of the S&P 500’s market capitalisation, according to Bank of America data. Headline profitability is being flattered by a small slice of the economy earning extraordinary returns from the scramble to build AI capacity. The risk, then, is that the economy, the profit cycle and the stock market “are all leaning on the same narrow pillar. If the expected returns on AI infrastructure and platforms are questioned, the fallout may not stop at a few richly valued technology stocks.”

As I have pointed out in previous posts, up to now the massive investment in AI has been mostly funded by the profits already being made by the hyperscalers. But given the impossibility of finding enough additional revenues to self-finance their capex plans, hyperscalers and their hardware providers are increasingly using external financing to fund them.

The first game is ‘circular financing’ ie by cross-investments between Microsoft, OpenAI, and others. In essence, a cash-rich hyperscaler like Microsoft buys hardware from Nvidia, AMD and other suppliers. Nvidia then uses that revenue to buy a multi-billion-dollar stake in OpenAI. OpenAI then uses this cash to secure compute in Microsoft data centres. Microsoft itself also invests in OpenAI and enters into a mutual revenue share where some of OpenAI’s revenues flow to Microsoft and vice versa as the two companies use each other’s products. Assuming that Microsoft spends $100bn to order hardware for data centres, Nvidia, AMD and other suppliers can recognise this $100bn as revenues. They then use that cash to invest in OpenAI (for example), which then uses this money to book data centre capacity with Microsoft. Microsoft recognises this OpenAI investment as revenue, thus effectively turning its $100bn expense into billions of revenue!

Even this is no longer enough, and increasingly, hyperscalers have started to resort to borrowing to raise the cash for investment. The US tech giants are issuing debt all over the world. Google/Alphabet is leading the charge.

So first, they invested with their own funds; then in each other; then they borrowed from the banks and so-called private credit funds;...