The tech investment bubble is going to end - and what comes next may be surprising, this strategist says

By Jamie Chisholm

History suggests AI investment will falter in 2026 says BCA Counterpoint strategist

Hyperscalers like Amazon Web Services have pledged billions more in AI-linked investment

The debate about how important the AI boom is to the broader stock market rumbles on - though most analysts remain optimistic Big Tech and energy can continue to benefit from elevated capital expenditure for a while yet.

But Dhaval Joshi, chief strategist for BCA Research's Counterpoint, is less sure. He says the AI investment splurge will likely end this year. The good news for equity bulls is that he reckons it won't be like the end of the dot-com bubble in 2000, and the stock market will be fine.

Joshi's expectation of a sharp slowdown in AI investment stems from his analysis of previous technology capex booms and their relation to the broader economy.

Current technology capital expenditure has reached a record 7.2% of U.S. GDP, he says in a note shared with MarketWatch dated Jan. 8. That's more than the 7.1% set the during post-pandemic work-from-home trend and notably more than 6.4% set during the dot-com bubble.

Indeed, the current percentage is likely to rise further if the roughly $1 trillion in AI-related capex putatively committed through 2026-27 by the so-called hyperscalers comes to pass, he adds.

However, Joshi says that any comparison with previous tech capex booms must also consider the structural uptrend in technology-related capex.

"Through the past century, total capex has stayed at a broadly constant 15% of U.S. GDP. But an ever-increasing share of this is going into tech capex, as the economy shifts from the 20th century's 'heavy industry' to the 21st century's 'weightless economy'," he says.

For example, in 1950, tech capex amounted to just 1% of U.S. GDP, or less than a tenth of total capex. Since then, the tech capex share in GDP has trended higher by about 0.7% every decade, according to Joshi. And so in order to assess the limits of the current AI capex boom we must look at tech capex not in absolute terms, but in relative terms to its structural growth. "A good way to do this is to look at the 10-year change in tech capex as a share of GDP, less the 0.7% per decade structural uptrend," he says.

Source: BCA Research

Doshi says we can draw three conclusions from previous peaks in relative capex spending, which occurred in the 1980's personal computer boom, the dot-com bubble into 2000, and the COVID pandemic's work-from- home revolution in 2020-21.

First, the capex booms from those three occasions ended when the 10-year change in capex as a share of GDP exceeded the structural growth rate by 1 to 1.5 percentage points. Next, the current capex boom has not reached those levels, so it may have further to go. However, given those hyperscaler spending commitments, "the AI capex boom will reach the previous empirical limit by the end of 2026," he says.

And it is the expectation of this that will impact investor thinking. "The stock market is a discounting mechanism, so it does not wait for a tech capex boom to end. It anticipates it," says Joshi.

But, and it's a big but, unlike in the bursting of the dot-com bubble in 2000, this time the market will face a more helpful interest rate environment.

The tech stock unwinds in 1984, 2000, and 2022 all happened during Federal Reserve rate hiking cycles, Joshi notes. This time the Fed is expected to continue cutting rates: "And if, as I expect, U.S. inflation remains stuck at around 3%, then the all-important real interest rate will continue to decline." (It was initially low real interest rates that helped tech stocks postpone their day of reckoning in 2021, he says).

This looming capex-peak and real interest rate set-up means that 2026 has closer parallels with 2021 than with 2000, and we should therefore expect the following, according to Joshi:

-- Absent an exogenous shock, a U.S. recession is unlikely.

-- The bull market will lose momentum, but stocks will outperform cash.

-- Tech stocks will lose market leadership, so the S&P 500 SPX will outperform the Nasdaq COMP.

-- The U.S. yield curve will bear steepen - long rates will rise faster than short-term rates - as inappropriately loose Fed policy causes long-term U.S. inflation expectations to grind higher.

-- But a key difference with 2021 is that the U.S. real interest rate will fall much faster than in other countries, resulting in a weaker U.S. dollar DXY.

The markets

U.S. stock-indices SPX DJIA COMP are higher at the opening bell on Wall Street as benchmark Treasury yields BX:TMUBMUSD10Y and the dollar index DXY pare earlier rises after jobs data. Oil prices (CL.1) are up and gold futures (GC00) are trading around $4,490 an ounce.

   Key asset performance                                                Last       5d     1m     YTD    1y 
   S&P 500                                                              6921.46    0.92%  1.38%  1.11%  18.78% 
   Nasdaq Composite                                                     23,480.02  1.05%  1.23%  1.02%  22.54% 
   10-year Treasury                                                     4.19       -0.50  0.60   1.80   -57.90 
   Gold                                                                 4478.5     3.14%  3.43%  3.38%  64.81% 
   Oil                                                                  57.97      1.12%  0.76%  0.98%  -24.29% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

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The buzz

U.S. nonfarm payrolls rose 50,000 in December, lower than the downwardly revised 56,000 in November, and less than forecasts for 64,000. The unemployment rate dipped from 4.5% to 4.4%.

Other U.S. economic data due Friday includes the University of Michigan consumer sentiment survey for January at 10:00 a.m.

U.S. President Donald Trump said he directed his "representatives" to buy $200 billion in mortgage bonds in order to drive down borrowing costs.

The U.S. Supreme Court may on Friday give a ruling on the legitimacy of Trump's tariff program.

General Motors (GM) said it will record more than $7 billion in charges in the fourth quarter, as it becomes the latest latest carmaker to write down billions in a pivot away from EVs.

Glencore (UK:GLEN) and Rio Tinto (UK:RIO) have resumed talks on a merger to create the world's biggest mining company.

Meta Platforms (META) announced agreements with Vistra (VST), TerraPower and Oklo (OKLO) to expand the operation of three nuclear power plants, "unlocking up to 6.6 [gigawatts] to power American leadership in AI innovation." Shares of Vistra and Oklo jumped on the news.

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The chart

Source: Societe Generale

Societe Generale's perennial bear Albert Edwards provides the chart which shows a U.S. employment rate and its relationship with recessions, as shown by the vertical grey bars. "No one is predicting a U.S. recession in 2026 despite this simple indicator having a 100% track record of success," says Edwards in a post on X. "This time may well be different, but you've got to have a bloody good reason to ignore this. Are you feeling confident?"

Top tickers

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   TSLA    Tesla 
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   TSM     Taiwan Semiconductor Manufacturing 
   PLTR    Palantir Technologies 
   AAPL    Apple 
   TLRY    Tilray Brands 
   AMZN    Amazon.com 
   MU      Micron Technology 
   AMD     Advanced Micro Devices 

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-Jamie Chisholm

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01-09-26 0931ET