Stocks Could Keep Rising Even if AI Spending Slows Down. Here's Why.

• U.S. tech giants (Microsoft, Alphabet, Amazon, Meta, Oracle) are projected to spend more than $500 billion on AI infrastructure in 2026, matching tech capex-to-GDP levels seen at peaks of previous cycles including the 1980s PC boom and 1990s Dotcom era
• Real bond yields (inflation-adjusted returns), not nominal rates, are the key driver of stock valuations; declining real yields from Fed rate cuts amid sticky inflation could prolong the rally even as AI spending plateaus
• The Fed's rate-cutting trajectory faces uncertainty as sticky inflation, stabilizing jobs, or strong economic growth could prevent aggressive cuts, with odds of no rate cuts in H1 2026 jumping to a one-month high after recent data

Summary: Stocks Could Keep Rising Even if AI Spending Slows Down

Key Thesis: Federal Reserve interest rate cuts could sustain stock market gains even if AI infrastructure spending decelerates, according to BCA Research's Chief Strategist Dhaval Joshi.

Major Data Points:

• U.S. tech giants (Microsoft, Alphabet, Amazon, Meta, Oracle) are projected to spend over $500 billion on infrastructure, primarily AI-related, in 2025
• This spending level as a percentage of GDP will match peaks from previous tech cycles: 1980s PC boom, 1990s Dotcom bubble, and post-pandemic "Zoom boom"
• Tech stocks typically begin underperforming approximately one year before capital expenditure peaks

Market Analysis:

Joshi argues the current cycle resembles the 2021 Zoom boom rather than the Dotcom crash, emphasizing that real bond yields (inflation-adjusted returns)—not nominal yields—drive stock valuations. Tech stocks maintained strength in 2021 despite inflation because real yields continued declining. Only when Fed rate hikes elevated real yields in 2022 did tech stocks tumble.

Current Outlook:

With the Fed signaling further rate cuts rather than hikes, declining real yields could support stock valuations even amid slowing AI investment. If inflation remains sticky while rates fall, this combination could prop up tech stocks.

Caveats:

Uncertainty exists around Fed accommodation. After recent jobs data, odds of no rate cuts in H1 2025 reached a one-month high. Factors including persistent inflation, stabilizing employment, or robust economic growth could prevent aggressive rate reductions despite political pressure from President Trump.

Bottom Line: Lower rates and potential tax cuts could offset sluggish tech performance, supporting broader market gains despite AI spending concerns.