It is hard to open a markets-focused publication these days without reading about artificial intelligence. And there is good reason. AI spending by large tech companies has propped up a wave of capital expenditure — data centers, chips, networking, and the energy to power it all.
Strong earnings momentum has accompanied that spending, helping lift the market. But a growing number of analysts are asking a pointed question: how much of this spending is genuinely productive?
The good news
Corporate earnings have been firm, and the market's recent gains are supported by real profit growth rather than hope alone. AI-related companies in particular have delivered results that justify at least part of the enthusiasm.
There is no question that AI represents a genuine technological shift. Enabled by real demand, the build-out is not obviously wrong.
The warning sign
The caution comes from the other side of the ledger. Not all capital spending is created equal. Some investments produce durable, useful assets. Others build capacity that the market does not actually need — or that becomes obsolete quickly as the technology keeps moving.
When a large share of economy-wide capital spending is concentrated in a single theme, there is a real risk of overbuilding. If demand fails to materialize at the pace companies expect, the excess capacity eventually shows up as weaker returns on that capital.
How to think about it
The best framework is a simple one: separate the technology from the trade. AI is almost certainly going to reshape the economy over the long term. But that does not mean every company spending heavily on AI today will earn a good return on that spending.
History is full of transformative technologies that created enormous wealth for a few winners while burning through the capital of many others. The railroads, the internet, and countless other booms followed exactly that pattern.
What it means for your portfolio
Earnings momentum is real, and markets can stay strong for a long time. But when a rally is increasingly powered by one theme — and that theme is funded by heavy capital spending — it pays to check whether your portfolio would survive a disappoint if the spending slows.
Diversification is the antidote. Own the theme if you believe in it, but do not let a single narrative become the whole story of your portfolio. As the saying goes, build for the future — just make sure you are not paying today for capacity the future does not want.