The current surge in AI spending, while indicative of technological advancement, is increasingly resembling a "speculative mania" driven by abundant central bank liquidity rather than organic demand from the real economy. This provocative insight comes from Bob Elliott, CEO and CIO of Unlimited, who recently joined CNBC's "Closing Bell Overtime" to discuss the roaring tech market and the implications of the massive capital expenditure fueling the AI boom.
Elliott spoke with host Jon Fortt about the recent market rally, particularly in tech stocks, and offered a critical perspective on the sustainability of the AI investment frenzy. He posited that the Federal Reserve's easy money policies, alongside those of global central banks, have created an environment where "all that liquidity... is being channeled into asset prices and basically moving from one mania to another when it comes to the financial markets." This influx of capital, rather than stimulating broad economic activity, has inflated asset valuations, pushing up tech stocks and fueling the AI infrastructure build-out.
While individual hyper-scalers and AI-focused companies are making seemingly rational decisions to invest heavily in infrastructure, the collective impact raises serious questions about long-term returns. Fortt challenged Elliott on this, suggesting that companies must build ahead of demand to stay competitive. Elliott agreed with the individual rationality but highlighted a systemic risk. "The challenge is," he explained, "that the environment might well be a winner take all environment... the real question is basically what is the likely ROI in all of this CapEx, and as a group does it make any sense?" This collective pursuit of dominance could lead to significant overcapacity and underutilized assets, diminishing the overall return on investment for the sector.
The analogy of Amazon's aggressive warehouse expansion during COVID, followed by a period of digestion and recovery, serves as a cautionary tale. Similarly, the current AI infrastructure build-out might face a similar fate. Big tech companies, with their robust core businesses, are channeling an unprecedented portion of their free cash flow into this high-stakes bet. "They've channeled all of their free cash flow, you know, something like 60, 70 percent of the free cash flow right now and moving towards basically all of their free cash flow into a huge AI bet," Elliott noted. This substantial commitment, while necessary for competition, carries inherent risks, especially if the anticipated revenue generation from AI applications does not materialize at scale or if the "winner-take-all" outcome leaves many significant players with stranded assets.
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For investors, this landscape calls for prudence. The free cash flow yields on many of these companies are currently very low, indicating that market valuations are already pricing in substantial future growth and profitability from AI. This creates a precarious situation where any disappointment could lead to significant corrections.
Elliott's advice to investors is clear and direct: "I think as an investor, you basically have to use this opportunity, this mania, to take some profits here. You know, there's no reason to go all in on this trade given the overall picture is not looking particularly compelling from an ROI perspective across the whole sector." He advocates for diversification and taking "chips off the table" when deeply in the money, echoing a timeless market adage: don't be greedy. The current AI excitement, while transformative, demands a sober assessment of risk and reward, especially when the underlying economic fundamentals appear detached from asset price inflation.
