Monthly Macro Insights: The AI Paradox, a Growth Engine with Rising Vulnerabilities (Rothschild & Co)

Summary

• Fears of a synchronized global downturn have repeatedly failed to materialize, with resilience supported largely by AI-related investment spending.p.1
• The largest hyperscalers are expected to spend around two trillion US dollars, increasingly outpacing earnings and free cash flow.p.1
• AI build-out is running into bottlenecks in electricity generation, advanced semiconductors and grid equipment.p.2
• The privileged position of the US rests largely on the role of the dollar as the world's dominant reserve currency.p.3
• Long-term interest rates have risen to their highest levels in more than fifteen years.p.4

Key insights

1. Hyperscaler commitments are prompting some firms to raise debt financing, leaving them vulnerable to disappointments in AI-related payoffs.p.1
2. Previous investment booms attracted more capital than commercial returns could justify, and most ended in an investment reversal.p.2
3. Long-term shortages may encourage over-investment as firms secure future capacity through long-term contracts.p.2
4. Persistent disputes with allies may encourage supply-chain diversification away from the US and weaken confidence.p.3
5. Most central banks have yet to achieve their inflation targets after more than five years.p.4
6. Widening fiscal deficits and the AI boom are adding upward pressure on long-term interest rates.p.4