Weekly Research Briefing: Well Below The Rim

For years, the companies behind America’s artificial-intelligence boom have raised hundreds of billions of dollars with ease. Wall Street eagerly ponied up capital and asked few questions.

Now, the balance of power is shifting.

Lenders and investors are getting choosier about where to place their bets and are demanding tougher terms, signaling a new phase in the AI build-out. Among their concerns: the prospect of delays in big projects as a grassroots political backlash to data centers gains traction, and the threat that AI-related profits from hyperscalers and startups such as Anthropic and OpenAI won’t materialize as fast as promised.

Plus, a flood of stock and bond offerings is compounding concerns that investors are getting overexposed to AI.

The new terms of trade are visible in every corner of markets. Bonds issued even by big tech companies such as SpaceX and Meta are trading at steep discounts. AI cloud companies such as CoreWeave, Nebius and Nscale that borrow big to build and sell capacity have effectively been shut out of the bond market in recent weeks, people familiar with the matter said.

Taken together, it all amounts to a buyer’s market for Wall Street. Even powerful players such as Broadcom are having to sweeten the terms offered to banks to secure loans. “The bar is going higher and higher in terms of proving to lenders that this investment will turn into sufficient revenue,” said Dan Ivascyn, chief investment officer at Pimco. “The weak links are going to suffer first.”

Cloud growth is accelerating across Big Tech:

$AMZN CEO: "AWS grew 39.3% year-over-year, accelerating for the sixth straight quarter, our fastest growth in nearly 5 years. Backlog is $578 billion, growing triple digits year-over-year and well diversified."

$MSFT CFO: "Azure revenue was ahead of expectations and increased 48%, even with the 3P capacity delays noted earlier, driven by Foundry and improved CPU monetization."

$GOOGL CFO: "Cloud revenues were up 103% to $30.7 billion, driven by strong growth in GCP, with strength in AI, including both AI infrastructure and AI solutions, and core GCP"

The hyperscalers split into two camps last week. The winning camp included Microsoft and Amazon, which pay for AI out of operating profits. Over the past four quarters, Microsoft’s cloud revenues totaled $229.2 billion and AWS’s $161.4 billion. Azure grew 48% y/y in the latest quarter, and AWS grew 39%.

Alphabet is in the second camp. Google Cloud generated $93.3 billion over the same period, but Alphabet’s Q3 revenues of $127.6 billion fell short of the $128.2 billion consensus on a miss in Search, and its free cash flow disappointed. The stock dropped 12.3% on Thursday.

Oracle is working its way into the first camp. At its Investor Day on October 28, management guidance included revenue growth of more than 35% a year through fiscal year 2030. The stock rose 10.6%, but has since given back almost all of the gain.

Demand is not the problem. The four largest cloud providers now report a combined $2.5 trillion in remaining performance obligations. Microsoft leads with $677 billion, up 73% y/y. Oracle follows at $664 billion, and Amazon’s backlog doubled to $578 billion. Alphabet’s reached $567.7 billion. The constraint is funding and delivering the AI infrastructure buildout necessary to monetize that backlog. Alphabet’s selloff showed how quickly investors punish spending that fails to convert into cash.

In contrast with the last few quarters, the outlook for hyperscaler capex spending has remained fairly stable this reporting season. Analysts continue to expect roughly $800 billion in capex in 2026. Estimates for 2027 spending now stand at $1.2 trillion, only slightly above the estimate prior to the hyperscaler earnings reports. The lack of revisions is consistent with our expectation that hyperscaler capex spending will increase substantially in 2027 but that we are moving past the peaks of both capex growth and upside surprises to consensus estimates.

@KevRGordon: Data center construction spending +90.3% y/y in September

Watch Meta’s C.D.S. contracts. They imply that it now costs about $125,000 a year to insure $10 million in Meta debt, according to S&P Capital IQ. That suggests a low probability of default, but shows that investors don’t consider the tech giant’s bonds as ironclad as they were not long ago.

“Since early September, what we’ve seen inside of the technology complex, outside of the technology complex...Interest rates have had an effect. You’ve seen market participants that are discriminating between the kinds of investments they want to make. You’ve seen credit spreads for certain assets widen out, gap out. For others you’ve seen some tightening in financial conditions, but not significantly. So on the thrust of your question of -- with respect to the new technology and this investment surge, do interest rates matter? I believe they do. And I don’t believe that they’re somehow divorced from the rest of the economy” - Federal Reserve Chair Kevin Warsh

The spread between returns on the equal-weighted and cap-weighted versions of the S&P 500 was wider in October than in any month since April 2009, when stocks rebounded after the Global Financial Crisis.

Bitcoin (-11.7%) and Gold (-10.2%) are the two worst performing major assets so far in 2026. This is something we haven't seen before in any calendar year.

Valuation multiples are falling even as earnings soar. The US MSCI’s forward P/E has dropped to 19.1 from 23.7 a year ago. Japan’s is 14.7, and the EMU’s is 13.9. The UK trades at 11.9. EM trades at 8.9, its lowest since the 2008 financial crisis.

Justin Stoneman has been in the trucking industry for 27 years, operating out of central Michigan’s agricultural heartland. Hauling grain and fertilizer around the Midwest, his 12-odd tractor trailers generated more than $3 million in annual revenue during their best times.

Those days are over. In the past year, Stoneman’s business has been squeezed by a range of pressures, from war-fueled spikes in diesel prices to rising insurance costs and onerous debts — all of which have pushed him to the brink. In May, his company, Stoneman Trucking LLC, filed for bankruptcy protection, but he has since lost hope and is shifting to chapter 7, to fully shut down operations.

“I’m so frustrated,” Stoneman said. “It’s like, what about all this ‘Drill, baby, drill’?”

Stoneman isn’t alone. At a time when affordability issues are at the center of US voters’ concerns heading into next week’s midterm elections, America’s smaller trucking operators are feeling the pinch. Some 221 trucking companies have filed for bankruptcy so far this year, according to data compiled by Bloomberg, extending a three-year spike at sustained levels not seen in decades.

I went to Mexico City this spring to test-drive the future.

What I saw was a split screen between a familiar past and a future of luxurious, space-age cars that cost far less than comparable models at home.

Mexico has become a showroom for the electric cars you can’t buy in the United States. Amid aging fleets of American Chevys and Fords is a growing stream of sleek new vehicles from Chinese EV brands you’ve never heard of, such as Zeekr, JAC and BYD.

A wall of tariffs, trade barriers and software restrictions effectively bans Chinese EVs from entering the U.S.

Many features were merely fun — heated massage seats, wild acceleration, karaoke mode and spa-like cabin settings. But the bigger difference was the amount of technology bundled into shockingly low prices: fast-charging, powerful batteries, sophisticated software and interior luxuries that sometimes came in Western models only at twice the price.

It’s working. Chinese branded vehicles have gone from less than 1 percent to 15 percent market share in five years, as well as about 90 percent of all EVs. That’s fast eroding America’s market in its backyard, as well as abroad, where the U.S. has seen its share fall or stagnate in Asia, Europe and Latin America. Even at home, the Big Three now command less than 40 percent of the auto market, down from 92 percent in 1965.

Much American EV technology can still rival or exceed anything Chinese automakers put on the road. Tesla’s self-driving autonomy, AI infrastructure, software and powertrain efficiency are considered best in class. But every year, the U.S. falls further behind. Tesla is no longer the world’s largest EV maker, a title claimed by China’s BYD last year, which has seen global sales surge as Tesla’s have retreated over the last two years.

BYD’s plug-in hybrid pickup has no American rival at any price — a dagger aimed squarely at the heart of the U.S. market.

Chinese cars can’t be kept outside the U.S. forever, argues Clifford Winston, an economist and fellow at the Brookings Institution who specializes in transportation. He predicts Chinese vehicles — or the technology inside them — will find their way into the American market within years, because the center of innovation of the global auto market has moved to China.

“Eventually, they’ll come here,” insisted Winston.