Fund managers warn AI investment boom has gone too far

A majority of global fund managers think companies are overinvesting, as market anxiety grows about the sustainability of the artificial intelligence spending boom.

A net 20 per cent of fund managers surveyed this month by Bank of America said companies were spending too much on their investments — the first time this has been a majority view in data running back to 2005.

“This jump is driven by concerns over the magnitude and financing of the AI capex boom,” said BofA analysts.

The surge in investment to develop AI infrastructure has been a dominant theme in the record rally in US tech stocks this year — with chipmaker Nvidia becoming the world’s first $5tn company last month — but growing concerns about the sustainability of this spending has caused a pullback on Wall Street in recent weeks.

The tech-heavy Nasdaq Composite shed 1.2 per cent on Tuesday and has fallen more than 5 per cent this month.

Investors are bracing for third-quarter earnings from Nvidia on Wednesday. The chipmaker’s share price fell on Monday after filings revealed that Peter Thiel’s hedge fund dumped its entire holding in the stock.

The tech spending boom is also reshaping credit markets: US companies have issued more than $200bn worth of bonds this year to finance their AI-related projects amid warnings over a “flood” of further issuance.

Anton Dombrovskiy, fixed income portfolio specialist at T Rowe Price, said “public and private credit seems to have become a major source of funding for AI investments, and its rapid growth raised some concerns”.

Some analysts have previously warned that the rise in capital expenditure by some of the so-called hyperscalers could begin to weigh on their share buyback programmes, which have helped to support equity prices this year.

Analysts at Barclays estimated that cumulative AI-related investment by hyperscalers and smaller companies could reach the equivalent of more than 10 per cent of US GDP by 2029.

More than 50 per cent of the fund managers surveyed by BofA, who between them manage about $500bn in investor assets, said that AI stocks were already in a bubble.

Some 45 per cent saw that as the biggest “tail risk” to markets and the global economy, up from 33 per cent last month, and overshadowing other threats such as inflation or a US consumer crunch.

Despite investors’ concern about the level of spending, the survey’s broad measure of investor sentiment — derived from cash levels, equity allocation and economic growth expectations — rose to its highest level since February this year, shortly before Donald Trump shocked markets with his global tariffs.

Investors’ average allocations to cash dropped to just 3.7 per cent of portfolios, which BofA pointed out is a level that has historically been followed by a drop in stock markets and a rally in government bonds in the following one to three months.