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Welcome to Thoughts on the Market. I'm Andrew Sheets, global head of Fixed Income research at Morgan Stanley. Today why capital expenditure is rapidly becoming one of the most important numbers in earnings season across asset classes. It's Thursday, April 30th at 2pm in London. This is a high risk episode in the sense that it may already be obsolete by the time that you hear it. But then again, maybe that's fitting for a discussion of record capital spending on cutting edge technology. We are in the middle of the busiest part of earnings season, and yesterday four of the largest companies in the world reported numbers. These companies, Alphabet, Amazon, Microsoft and Meta have a combined market cap of nearly $12 trillion. Yet while the focus of earnings season is traditionally about earnings, another line item is rapidly rising in importance. Capital spending on AI infrastructure, the chips, power, cooling and connections that are required to build and run AI models is soaring, and the companies that reported yesterday are at the leading edge of this trend. The first thing about all this spending is simply the scale. For this year alone, Morgan Stanley estimates that it will amount to over $600 billion across the largest U.S. hyperscalers. To put that in perspective, that means just a handful of US Tech companies are now set to spend almost as much on capital and equipment this year as every non technology company in the S&P 500 did in 2025. And as big as that spending is, it's been accelerating. That over 600 billion spending number that we forecast for 2026, well, a year ago we thought it would be roughly half that, and that estimate was well above consensus at the time. US Companies have repeatedly guided their spending higher as they seek to capture the AI opportunity, and we think that continues by 2028. My Morgan Stanley colleagues estimate that this US hyperscaler capital spending could hit an annual rate of $1 trillion. In other words, as big as these numbers may seem, much of the spending story still lies ahead. All of that investment, both recently and in the future, has big implications. First, one company's spending is another company's revenue, and many of the stock market's recent winners have been directly tied to this historic buildout. As of this recording, US semiconductor stocks have risen over 30% this month alone. Second, while these large US tech companies have enormous financial resources, this spending is at a scale that still requires significant borrowing. Our credit strategy teams expect record bond issuance this year, with US Tech borrowing a big part of that, and so far it's playing out. The first quarter was the busiest quarter for US Investment grade bond issuance on record, which brings us back to these recent earnings and a dilemma that seems negatively skewed for credit relative to equities. If these companies continue to sound confident about their capital spending plans or even raise expectations further, that could support AI suppliers and the broader equity market. But it would mean even more borrowing needs to be absorbed by the corporate bond market, a credit negative. The results we got yesterday certainly hint at a continuation of this trend. On the other hand, if capital spending is guided down, that could undermine a key pillar of recent market strength and broader risk appetite, which could drag credit wider by association. In the near term, the risk reward seems better in other parts of fixed income such as mortgage backed securities. The implications of yesterday's results may also extend to the Federal Reserve. As we discussed last week, Kevin Warsh, nominee to be the next Fed Chair, believes that large levels of investment can boost productivity, lowering inflation and thus justifying lower interest rates. And so what these large spenders do, how confident they feel about the future and what all of this spending can ultimately deliver, well, the implications of that may extend even into the monetary policy story. Thank you as always for your time. If you find thoughts of the market useful, let us know by leaving a review wherever you listen and also tell a friend or colleague about us today.
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