Despite lofty expectations, prudence remains crucial in the early phases of AI development.
Hyperscaler companies, such as Amazon, Alphabet, Meta Platforms, and Oracle, have rapidly increased their AI related capital expenditure (capex) over the past 3 years. These large-scale cloud computing firms require massive computing resources, data storage, and networking services to create and maintain their AI models. In 2024, these companies collectively increased their capex by over 50%, reaching north of $200 billion. Consensus forecasts from FactSet suggest that these companies will invest hundreds of billions more over the next five years.
Chart Check: Significant Capital Spending Forecast for AI-related Activity
Our Take
The allure of AI has been well documented, and many large firms are attempting to stake their claim. If successful, investments in AI will improve operational efficiency and spur productivity growth. This current boom in capital expenditure carries an added bonus due to its financing. Unlike past cycles, which have tended to rely heavily on issuing large amounts of debt, firms making AI investments have been supported using internal cash flows from other business lines, reducing their financial stress.
While the prospect of high ROI on growth stocks is enticing, diversification and prudent investing remain crucial. As is true with all advancements, development and implementation may face delays, which may cause equity drawdowns. A recent example occurred in January with the “DeepSeek scare”, a harrowing example that some investors have forgotten. In the scare, some of the largest companies in the world swiftly fell 10% or more on the fear of reduced AI investment. Ultimately, the episode did not change the structural view of the market, and it represented a solid buying opportunity, but do not be mistaken in assuming the rollout will be an entirely smooth ride. The best strategy is diversification and tying your investments to solid fundamentals. As the old investment saying goes, you don’t get paid in innovation, you get paid in cash flow.
Economic Recap-Consumer Focus
Retail Sales: After monthly declines in April and May, U.S. retail activity rebounded in June, signaling renewed consumer momentum. Headline retail sales were up 0.6% month-over-month, significantly outpacing analysts’ expectations of a 0.1% gain. Strength was broad-based across the major categories, with automobiles (1.2%) leading the advance. Perhaps even more encouraging, “control group” sales – which excludes volatile categories such as autos, gas, and building materials to better gauge core demand – posted a solid 0.5% increase. Spending at restaurants and bars, the only services category within the Retail Sales report, also improved. With consumer spending accounting for more than 60% of overall US economic activity, June’s data suggests continued consumer resilience and a solid backbone for the U.S. economy despite widespread uncertainty.
Retail Sales Rebound in June
Student Loans: A relatively low debt load kept the U.S. consumer afloat despite the tighter macro-economic environment of the 2020s. From 2020 through 2023, student loan payments were paused due to the COVID-19 pandemic. In May 2025, collections on defaulted student loans resumed. Most recent data suggest $1.6 trillion of outstanding student loan debt, making it the 3rdlargest category of household debt. However, this staggering figure deserves context; student loans represent only 9% of the total $18.2 trillion in U.S. household debt. Furthermore, while collections have begun, only roughly 8% of student loans are delinquent (30+ days past due) which is lower than the 10.50% average delinquency rate reported in the five years preceding the pandemic.
Surely, an increase in debt load will impact the consumer, no matter the source. However, borrowers with subprime credit (typically associated with credit scores below 670) accounted for more than 50% of newly delinquent loans1. Furthermore about 40% of total student debt is held by borrowers owing $100,000 or more2, associated with graduate degrees and higher expected wages. The debt load appears manageable, assuming diplomas lead to careers. A crucial peripheral datapoint that warrants monitoring in the future is the recent college graduate unemployment rate. This figure has recently edged higher to 5.8%, much higher than the nationwide rate of 4.1%. Some commentators have pointed to AI replacing jobs originally established for recent grads. Should recent grads continue to struggle to find employment, delinquencies and debt service ratios could creep higher and consumer spending slow.
Student Loan as a Percent of Total Household Debt
1 The New York Fed
2 The Department of Education
Economic Data
Market Recap
Investing at an All-Time High: As noted in last month’s article, global stocks have enjoyed a healthy rally since early April. In fact, the S&P 500 notched seven more all-time highs since our late June update. This begs the question: What should investors expect now? As is true with most market events, new all-time highs are not a reason to materially change portfolios. All-time highs are a common event; in fact, since 1930, the S&P 500 has hit 1,488 all-time highs, or roughly 16 a year. As seen in the table below, stocks enjoyed above-average returns over the 1-, 3-, and 5-year intervals after reaching such milestones. The reality is that stocks reaching an all-time high is a broadly bullish indicator, and investors should be optimistic about the intermediate-term prospects for equities.
Forward Returns Following All-time Highs
Market Data
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