From the desk of the CIO: In July, gravity finally caught up with soaring IT returns

By Bryce Anderson, Head of Multi-Asset Strategies

Key points

• IT flips from leader to laggard
• AI investment is increasingly funded by debt
• Investor borrowing is adding to market risks

Questions have resurfaced over whether large tech companies will ultimately earn enough from AI to justify their enormous spending. The spectacular rally in semiconductor stocks reversed, while non-IT sectors rebounded strongly. Energy stocks were among the beneficiaries as tensions between the US and Iran flared up again.

The scale of investment in AI is extraordinary. The largest technology companies are expected to spend more than US$3 trillion over the next three years on advanced computer chips, data centres and the power infrastructure needed to support AI systems. What is changing is how this spending is being funded. Debt is playing a much larger role than in previous investment cycles, with companies also making use of leasing arrangements and other financing structures that can make the full extent of future commitments less obvious.

This investment boom is helping drive economic growth, particularly in the United States and in countries such as Taiwan and South Korea that play a critical role in the technology supply chain. For investors, however, it creates an important question. The more money companies commit to long-term projects, the less certain the eventual returns become. At the same time, borrowing more means taking on larger financial commitments that must be met regardless of how successful those investments prove to be.

None of this suggests the major technology companies are in trouble. They entered the AI race as some of the strongest and most profitable businesses in the world. However, as spending and borrowing rise, investors should not assume that the future will look exactly like the past. Recent share price falls have created better opportunities in some parts of the technology sector, but overall we remain selective and cautious.

Companies are not the only ones taking on more debt. Investors are doing the same. More people are using borrowed money to invest, either through traditional margin loans or newer investment products designed to enhance gains.

The challenge is that borrowing can make market movements more extreme. Rising markets often encourage investors to buy more, helping to push prices even higher. However, when markets fall, those using borrowed money may be forced to sell, which can accelerate declines. In short, borrowing tends to amplify both gains and losses.

History provides some useful lessons. The 1987 share market crash was made worse by investment strategies that required investors to sell as markets fell. A similar pattern emerged during the Global Financial Crisis, when many investors had borrowed heavily to invest in assets that appeared safe until conditions changed. In both cases, borrowing turned market weakness into something much more severe.

Today, much of this borrowing is concentrated in the market’s most popular AI-related stocks. That is often how investment cycles develop. Strong performance attracts more investors, which attracts more money, pushing prices higher still. Eventually, expectations can become difficult to meet.

This is why we continue to place a strong emphasis on valuation discipline and diversification. While AI remains a powerful long-term theme, we believe investors should avoid concentrating too heavily in a narrow group of companies. Opportunities in areas such as European consumer-focused businesses, Brazilian equities, healthcare and high-quality government bonds can provide diversification and returns that are less dependent on the continued success of the AI boom.

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