Tag: AI
Asset Allocation Bi-Weekly – The AI Arms Race: Navigating the Divide Between Promise and Profit (October 6, 2025)
by Thomas Wash | PDF
AI is arguably the most exciting investment story of our time, with discussions swirling around its potential to create new businesses, boost productivity, and drive unprecedented revenue growth. This excitement has fueled massive spending as tech firms race to capitalize on the technology’s promise. As the hype has intensified, however, a critical question has emerged: Is AI growing faster than our ability to adapt to it?
A recent MIT report, “The GenAI Divide: State of AI in Business 2025,” suggests this may be the case. The study reveals a staggering 95% of corporate generative AI pilots have failed to deliver a measurable return on investment. This poor performance is fundamentally attributed to “execution failure,” with key issues including a lack of organizational readiness and a disconnect between the technology and day-to-day business workflows. The report also found that firms using consultancy services were more successful, highlighting that effective implementation and user adoption are critical to success.
This finding aligns with a separate trend observed in a U.S. Census Bureau survey, which shows that large firms have begun to slow their adoption of AI. This indicates that the initial hype that fueled demand may be giving way to a more cautious, results-driven approach as companies grapple with the practical challenges of integrating AI into their operations.
The current spending by major tech companies on AI infrastructure suggests that while AI may be the technology of the future, they are investing as if it’s already a present-day reality. Driven by the immense computational and energy needs of training large AI models, firms like Microsoft, Alphabet, Meta, and Amazon have made the uncharacteristic decision to ramp up capital expenditures.
In 2025 alone, tech companies are projected to spend up to $344 billion on AI infrastructure, including data centers and the hardware required to run complex models. This surge marks a sharp departure from the sector’s traditionally asset-light strategy, which prioritized intellectual property over physical assets to maintain large cash reserves. The current high-stakes environment has led to a massive increase in capital expenditures (capex), often referred to as the AI “arms race,” which is rapidly drawing down the operating free cash flow of many major tech companies.
This capital-intensive trend is expected to continue, significantly aided by the passage of the One Big Beautiful Bill Act (OBBBA) in July. This legislation permanently reinstated a 100% bonus depreciation for qualified property (like computer equipment and servers) acquired after January 19, 2025. It also introduced a new, temporary allowance for 100% expensing of “Qualified Production Property.”
The significant effort to build out AI infrastructure has acted as a healthy indicator of growth across the sector, boosting revenue for numerous suppliers. Nvidia has been the most notable beneficiary, but other firms, including Intel and SAP, have also seen gains. Most recently, Oracle saw its stock jump by nearly 30% after reporting that its first quarter booked revenue included over $455 million in new business related to its cloud infrastructure, signaling strong enterprise demand for AI-enabling services.
While supplier earnings remain robust, the sector faces growing risks of over-dependence. Many key AI technology providers rely on a highly concentrated group of customers — primarily the few cloud giants — for the vast majority of their revenue, raising concerns about the concentration risk inherent in their earnings estimates.
Furthermore, concerns persist that a significant portion of AI funding is circulating within a closed loop of major companies. This occurs when cloud giants invest in smaller AI startups, which then use that capital to purchase cloud infrastructure and compute time from their investors. This circular dynamic risks distorting genuine market demand and may artificially inflate the revenue of the largest players.
Despite these concerns, we believe the current equity rally has a strong chance of continuing for the foreseeable future. The bull market, which began in October 2022, has historical precedent on its side, with average cycles lasting about five years, suggesting the potential for another two to three years of upside.
However, given the market’s heavy concentration in large cap technology, the risk of a sharp correction in these high-growth stocks is elevated. To mitigate this risk, we recommend maintaining exposure to value stocks, which can provide crucial defensive ballast to a portfolio. Value-oriented sectors typically exhibit lower volatility and have historically demonstrated greater resilience during periods of economic uncertainty or growth stock selloffs.
Don’t miss our accompanying podcasts, available on our website and most podcast platforms: Apple | Spotify
Bi-Weekly Geopolitical Podcast – #73 “The Great AI Race: A Sputnik Moment for the 21st Century” (Posted 9/15/25)
Bi-Weekly Geopolitical Report – The Great AI Race: A Sputnik Moment for the 21st Century (September 15, 2025)
by Thomas Wash | PDF
On his first full day in office, President Trump convened a group of prominent tech leaders in what he characterized as an effort to secure the United States’ technological future. This meeting launched the largest artificial intelligence infrastructure initiative in US history, named Stargate Project. The strategy forged a major public-private partnership with firms such as OpenAI, SoftBank, and Oracle, creating a joint venture with a fund that will exceed $500 billion over the next four years in order to cement US global dominance in artificial intelligence (AI).
This initiative placed the US at the forefront of a struggle with China that transcends a mere contest for technological supremacy; it is a fundamental clash of economic systems. While both are engaged in industrial state policy, China employs a state-guided, top-down model, using its bureaucracy to steer markets toward national objectives. In contrast, the American industrial approach is decentralized and industry-led, relying on private enterprise to drive innovation and growth.
The outcome of this contest will do more than anoint a global technology leader. It will also determine the dominant economic framework of the 21st century, which could not only profoundly reshape the world economy but also the architecture of the global financial system. Thus, much like Sputnik, this isn’t just about a single technological achievement; rather, the future of the global order could be at stake. In this report, we discuss the AI race between the US and China and what it means for markets going forward.
Don’t miss our accompanying podcasts, available on our website and most podcast platforms: Apple | Spotify
Confluence of Ideas – #43 “The Mid-Year Geopolitical Outlook 2025” (Posted 7/18/25)
Bi-Weekly Geopolitical Report – Mid-Year Geopolitical Outlook: Searching for the Endgames (July 14, 2025)
by the Confluence Macroeconomic Team | PDF
As the first half of 2025 draws to a close, we typically update our geopolitical outlook for the remainder of the year. This report is less a series of predictions as it is a list of potential geopolitical issues that we believe will dominate the international landscape for the rest of 2025. The report is not designed to be exhaustive. Rather, it focuses on the “big picture” conditions that we think will affect policy and markets going forward. Our issues are listed in order of importance.
Issue #1: US-China Tensions Remain
Issue #2: Russian-Ukraine War Continues
Issue #3: Fallout From Israel-Iran War
Issue #4: US Mulls Capital Controls
Issue #5: Prospects for Lasting Economic Change in Europe
Issue #6: AI Investing Gets Second Wind
The podcast episode for this particular edition will be posted under the Confluence of Ideas series later in the week.
Asset Allocation Bi-Weekly – #142 “The Economy That Won’t Die” (Posted 6/16/25)
Asset Allocation Bi-Weekly – The Economy That Won’t Die (June 16, 2025)
by Thomas Wash | PDF
The old Wall Street quip about economists having “predicted nine of the last five recessions” has never felt more painfully relevant. Since the pandemic era began, economists have sounded the recession alarm no fewer than three times: first when gross domestic product (GDP) shrank in early 2022, again during the Silicon Valley Bank crisis of 2023, and most recently when the Sahm Rule was triggered during the summer of 2024. Yet America’s economic engine keeps chugging along, leaving analysts scrambling to explain why the doom forecasts keep missing their mark.
The stock market’s reaction to President Trump’s tariff announcement followed this now-familiar pattern of panic and resilience. Initial headlines sparked a sell-off that briefly dragged the S&P 500 stock price index below 5,000 for the first time in months. But within weeks, the index came roaring back, erasing its year-to-date losses and flirting with bull market territory. This whipsaw action revealed an important truth: Investors are increasingly betting that the economy can absorb policy shocks that would have crippled previous expansions.
This underlying economic resilience, even in the face of apparent warning flags, highlights the importance of looking beyond superficial data. The solution may lie in what analysts call “core GDP,” which measures the final sales to private domestic purchasers. Where the headline GDP figure mixes volatile government spending and trade data with underlying demand, this refined metric instead focuses solely on how much US households and businesses are actually buying. This distinction proved critical in understanding the first quarter’s apparent contraction, which upon closer examination revealed more about temporary distortions than fundamental weakness.
In the first quarter, a surge in imports caused by companies racing to beat the coming tariffs artificially depressed the GDP numbers, while simultaneous government spending cuts further skewed the picture. Meanwhile, the core GDP figure told a different story about the real economy. Consumer spending slowed and rotated from discretionary goods to consumer staples and services, but it didn’t contract. Most tellingly, business investment accelerated, particularly in technology sectors because of what appears to be an influx of AI-related capital expenditures.
This wave of AI investment has helped blunt the impact of tariff uncertainty in early 2025. Despite the positive momentum, a caveat remains. The economy’s and market’s reliance on technology investment seen in the first quarter may not be sustainable if trade restrictions lead to critical shortages. AI development, in particular, is vulnerable to the availability of essential mineral resources, such as rare earths, which could limit its expansion. Therefore, we believe the economy and market can continue to defy skeptics, provided trade relations are meticulously managed.
Looking ahead, we suspect that as long as the Trump administration continues to facilitate the expansion of AI firms, it will remain a positive driver of growth. For the broader economy, any indications that a trade war will not result in painful outcomes — such as elevated inflation and unemployment — should encourage increased consumer and business spending. We continue to believe that stocks and other risk assets can continue to recover, with prospects especially positive for quality assets. This assessment reflects both the prevailing uncertainty with a dash of hope for improvement after the July 9 tariff deadline.