AI may be engineering its own bust

Investors banking on AI growth and falling rates may be overlooking AI’s inflationary risk. The data center construction boom has ignited rallies across stocks and bonds, but the surge in demand for electricity, chips, and skilled labor is pushing prices higher. As “AI-flation” threatens to keep the Federal Reserve cautious, markets are heading into a year where the price of building the future could test today’s valuations.

By the numbers: The S&P 500 climbed 16% in 2025, lifted by monetary easing and enthusiasm for AI. However, the rally was unusually narrow. Just seven major tech groups generated half of all market earnings, pulling European and Asian equities — and US Treasury bonds — to record highs alongside them, Bloomberg data shows.

The inflationary feedback loop

While investors expect falling interest rates, the AI build-out could stall the easing cycle — or push rates higher. Hyperscalers including Microsoft, Meta, and Alphabet are locked in a USD multi-tn data center race. Capital spending is projected to hit USD 4 tn by 2030, with USD 440 bn next year alone, Deutsche Bank and Bloomberg estimate. This spending strains real-world resources — energy and advanced chips — creating bottlenecks and price pressures, analysts told Reuters, keeping US inflation above the Fed’s 2% target through 2027, Morgan Stanley predicts.

A pickup in inflation and tighter money as a result could be the “pin that pricks the bubble,” Royal London Asset Management Head of Multi Asset Trevor Greetham warns. Higher rates would hit speculative tech stocks hardest, raising funding costs while squeezing margins across the AI supply chain.

The strain is already visible in corporate earnings, where Oracle shares fell late last year after revealing soaring spending, Broadcom slid after warnings that high margins would be squeezed, and HP Inc. expects net income pressure in late 2026 as memory chip costs rise with data center demand.

AI’s bond market bonanza

The AI boom is also reshaping credit markets. To fund massive data center projects, tech firms and utilities are issuing record columns of high-grade debt, Bloomberg reports. This wave pushed corporate bond trading to record levels in 2025, averaging USD 50 bn a day, up from USD 46 bn in 2024.

As new AI-linked bonds flood the market, investors are rotating aggressively, selling older debt to make room for fresh paper. This has fueled a growing secondary market for private credit, which Morgan Stanley’s Rehan Latif called “the biggest single opportunity coming into 2026.” However, rising use of credit default swaps suggests that investors are quietly hedging against an AI unwind.

Is it a bubble?

With valuations stretched, comparisons to past bubbles are growing louder. The top 10 stocks now account for 40% of the S&P 500 — a level unseen since the 1960s — while the Shiller P/E ratio, a long-term, inflation-adjusted valuation gauge, trails only the highs of the early 2000s. However, today’s tech giants show stronger balance sheets and real bottom line growth.

The boom has a circular quality that unsettles skeptics. OpenAI’s USD 1 tn infrastructure pledge largely flows back to the same listed tech giants funding it, creating a closed revenue loop that magnifies both gains and risks.

Still, Wall Street expects the stock market can secure a fourth consecutive year of gains in 2026, following double-digit increases from 2023 through 2025. However, the mood is one of cautious optimism, according to the Wall Street Journal. While analysts generally predict upward movement, they acknowledge the path forward will be tighter and more difficult than the torrid rallies of previous years.

MARKETS THIS MORNING-

Yesterday’s global stock rally pushed Asia-Pacific stocks to a broadly positive start to trading today, with virtually all markets — except South Korea’s Kospi index — in the green. Wall Street futures, meanwhile, are trading flat after the Dow Jones closed yesterday at an all-time high, driven by energy, financial, and defense stocks.

THE CLOSING BELL: TADAWUL-

The TASI fell 0.4% yesterday on turnover of SAR 4.0 bn. The index is down 1.6% YTD.

In the green: SIDC (+6.3%), Alyamamah Steel (+6.1%) and Cherry (+5.3%).

In the red: Bahri (-5.9%), Burgerizzr (-5.8%) and Acwa Power (-4.7%).

THE CLOSING BELL: NOMU-

The NomuC fell 0.6% yesterday on turnover of SAR 24.9 mn. The index is down 0.3% YTD.

In the green: Riyadh Steel (+9.1%), Pro Medex (+5.1%) and Atlas Elevators (+4.9%).

In the red: Mayar (-12.9%), Hamad Bin Saedan Real Estate (-9.5%) and United Mining (-9.1%).

Corporate actions

Salama Cooperative Ins.’s shareholders greenlit a 62.98% capital increase to SAR 488.9 mn, paving the way for the Enaya merger, the firm said in a disclosure to Tadawul. The capital hike will be executed through the issuance of 18.9 mn ordinary shares, raising Salama’s share count to 48.9 mn, with Enaya shareholders set to receive 0.82 Salama shares for each Enaya share held.

Upon the transaction’s completion, Enaya’s assets, rights, and obligations will transfer to Salama, resulting in an ownership structure of 61.4% for Salama’s existing shareholders and 38.6% for Enaya’s. The merger had initially been scheduled to take full effect tomorrow, with fractional share distributions completed by early February. However, the timeline was pushed back after Enaya failed to secure the required quorum for its general assembly meeting.

Methanol Chemicals Company (Chemanol) formally moved forward with its capital restructure plan after posting SAR 577.9 mn in accumulated losses, submitting a request to the Capital Market Authority to cancel 52.5 mn shares, it said in a Tadawul disclosure. The losses now amount to 85.7% of Chemanol’s capital, forcing the company to expand the capital reduction from the SAR 535.5 mn it had initially proposed. Chemanol will use SAR 53.4 mn from its statutory reserve to cover the remaining losses.

ICYMI- Chemanol revived a two-year-old plan last month to increase its capital by 51.9% to SAR 350 mn via a rights issuance. This came after almost two years of challenges during which Chemanol’s capital hike ambition was nearly halved (from SAR 674.5 mn). Chemanol was forced to write off SAR 127 mn in goodwill tied to its 2024 acquisition of Addar Chemicals and Global Company for Chemical Industries and a record SAR 374 mn in related asset impairment — prompting the board to propose a SAR 535.5 mn capital reduction in October.