From the studio

Podcast:Signal over Noise with Ulrike Hoffmann-Burchardi on Apple, Spotify (7 min)
Podcast: What the US-China AI race means for energy markets (9 min)
Video: Our new AI capex forecast and its implications for the AI story (4 min)

Thought of the day

Big tech companies are increasingly tapping into the debt market in their race to build data centers that can power artificial intelligence. Amazon on Monday raised USD 15bn in its first US dollar bond offering in three years, with the proceeds topping initial estimates by USD 3bn. This follows Alphabet’s USD 25bn bond sale earlier this month, Meta’s USD 30bn bond issuance last month, and Oracle’s USD 18bn debt placement in September.

The rapid pace of these debt transactions has added to investor concerns over the sustainability of the AI-driven equity rally amid elevated valuations, raising questions over big tech’s ability to fund their AI expansion as monetization continues to lag. It also draws parallels to the dotcom era, which saw an abundance of credit-fueled excessive investment. The Nasdaq fell 0.8% on Monday, with the benchmark now standing 5.2% below its all-time high set at the end of October.

However, without taking any single-stock views, we believe the AI rally has been supported by solid fundamentals, and the financial health of big tech firms provides a strong foundation for continued investment.

Big tech companies are funding the majority of their capex with operating cash flows. Today’s leading tech firms generate substantial operating cash flows, and we estimate about 80-90% of their planned capex still comes from these cash flows. We view this mix of funding approaches as healthy. While major hyperscalers could become more frequent bond issuers, rising credit risk premiums can act as a self-correcting mechanism, in our view, limiting excessive balance sheet expansion by management teams. Additionally, the scale of vendor financing, a key factor in the formation and collapse of the dotcom bubble, has declined significantly. We estimate that the recent collaborations between NVIDIA, Oracle, and OpenAI represent only about 5% of NVIDIA’s projected pretax earnings for 2026, well below the over 120% levels observed during the late 1990s.

The free cash flows and credit profiles of today’s leading tech firms remain robust. While there are important distinctions in the fundamentals of big tech companies now, most of them hold more cash on their balance sheets than debt, resulting in a net cash position. The average time until these companies’ outstanding debt obligations mature is also considered long, as recent issuance has maturities extending up to 40 years—further supporting their strong liquidity positions. This provides substantial additional debt capacity relative to their existing credit profile ratings, and rating agencies generally view the increased leverage as manageable given their scale and cash flow generation.

Strong investor demand should absorb additional bond issuance. Despite this fresh wave of bond sales, we believe investment grade credit markets have the capacity to absorb further AI capex-related funding amid persistent investor demand. This is especially true for long-dated tenors, as they are favored by insurance companies and pension funds, and new issuance has been scarce. Meta’s USD 30bn issuance reportedly attracted a record USD 125bn in orders, while Amazon’s attracted about USD 80bn in demand. We expect the spreads of investment grade bonds in the tech sector to trade in line with the IG index, suggesting limited impact on the broad IG credit market.

So, while we continue to monitor the pace and scale of debt-funded AI capex against revenue and earnings growth, we maintain our positive view on AI’s structural growth story, which should drive further equity performance. Participation in transformative trends is often essential for long-term wealth preservation and appreciation, and we believe underallocated investors should add exposure.