Podcast Summary: Should AI Spending Worry Investors?

Podcast: Thoughts on the Market
Host: Andrew Sheats, Head of Corporate Credit Research at Morgan Stanley
Date: October 23, 2025

Main Theme

Andrew Sheats examines whether the current surge in capital expenditure (“Capex”) on artificial intelligence (AI) technology should worry credit investors. Drawing historical parallels with previous investment cycles, he outlines why today’s AI spending likely has more runway and fewer credit risk warning signs—at least for now.

Key Discussion Points & Insights

1. The Scale and Timing of the AI Investment Cycle

• Sheats characterizes AI-driven investment as "one of the largest investment cycles of this generation."
• Despite the attention, most of the expected AI-related spending is still ahead:

  “Most of the spending that we expect is still well ahead of us. It's only really ramping up starting now.” (A, 00:54)

• Morgan Stanley’s collaborative research shows that significant Capex on AI is just beginning, not peaking.

2. Who’s Doing the Spending?

• Unlike past cycles, the bulk of AI investment is being made by “some of the biggest, most profitable companies on the planet,” who:

  "...increases their willingness to invest and stick with those investments, even if there's a lot of uncertainty around what the return on all of this expenditure will ultimately be.” (A, 01:19)

• These firms have strong balance sheets and significant debt capacity, distinguishing them from often more leveraged players in prior cycles.

3. Lessons from Past Investment Booms

• Sheats compares AI Capex to previous cycles—railroads, electrification, the Internet boom, and shale oil—where heavy, successful investment still triggered credit risks.
• The main pitfall was not the failure of the technology but “overcapacity”:

  “...you build a lot of it and then sometimes you build too much. You build ahead of the underlying demand and that can lower returns on that investment and cause losses.” (A, 02:24)

• Credit trouble emerges when builders overestimate demand or run out of financial resources to bridge the gap.

4. Why AI Is (So Far) Different

• Current AI investments mostly avoid these historic credit risks:
  • Ongoing Demand: Data centers see robust, actual demand.
  • Financial Strength: Leading investors are “backed by companies with extremely strong balance sheets and significant additional debt capacity.” (A, 01:46)
• Caution remains, but the main risks (overcapacity/weak sponsors) are not currently problematic:

  “So far, that's not what we see. Data centers are still seeing strong underlying demand and are often backed by companies with exceptionally good resources.” (A, 03:01)

5. What Could Change This View?

• Sheats notes the need for vigilance:

  “We need to watch if either of these change, but for now we think the AI Capex cycle has much further to go.” (A, 03:12)

• The risk signals would be a shift in demand fundamentals or financial strength of the investing companies.

Notable Quotes & Memorable Moments

• “AI related investment will be one of the largest investment cycles of this generation.” (A, 00:14)
• “It's usually not about the technology not working per se, but rather a promising technology being built ahead of demand for it...” (A, 02:46)
• “But for now we think the AI Capex cycle has much further to go.” (A, 03:12)

Important Segment Timestamps

• 00:00 – 00:54: Overview of the AI Capex debate and historical context
• 00:54 – 01:19: Data-driven outlook—most AI Capex still ahead
• 01:19 – 01:46: Profile of the current investors and their approach
• 01:46 – 02:24: Contrast with prior cycles (Internet, shale oil) and credit risk factors
• 02:24 – 03:01: Historical pitfalls—overcapacity, demand lag
• 03:01 – 03:12: Present conditions versus the past; forward-looking caution

Conclusion

Andrew Sheats argues that, while investor concerns about overheated AI Capex are understandable, key differences—especially the financial strength of the main investors and ongoing demand—set this cycle apart from past bubbles. He advises continued scrutiny, but for now, the AI investment boom appears set to continue without triggering near-term credit alarms.