Who Will Fund AI’s $3 Trillion Ask?

Summary

Summary of "Who Will Fund AI’s $3 Trillion Ask?"

Podcast: Thoughts on the Market
Host: Morgan Stanley
Release Date: July 25, 2025

Introduction

In the July 25, 2025 episode of Thoughts on the Market, Morgan Stanley's Head of Corporate Credit Research, Andrew Sheats, delves into the colossal financial demands posed by the burgeoning artificial intelligence (AI) sector. Titled "Who Will Fund AI’s $3 Trillion Ask?", the episode examines the infrastructure investments necessary to support AI's rapid integration into daily life and explores the potential funding avenues required to meet these needs.

The Expanding Role of AI in Daily Life

Andrew Sheats opens the discussion by highlighting the pervasive role of AI in modern routines. From mundane tasks like checking the weather and navigating via smartphones to more significant applications such as writing speeches and managing health regimens, AI's footprint is undeniably growing. These functionalities depend on vast physical infrastructures, including advanced chips, expansive data centers, and substantial electricity supplies.

Notable Quote:

"AI is rapidly becoming a regular part of our daily lives... these capabilities require enormous physical infrastructure, from chips to data centers to the electricity to power it all."
— Andrew Sheats [00:50]

Projected Growth and Financial Demands

Sheats emphasizes that while AI has already made significant strides, the coming years will witness unprecedented growth in its infrastructure needs. Over the next five years, global data center capacity is anticipated to increase by sixfold. The financial implications of this expansion are staggering, with an estimated $3 trillion investment required by the end of 2028 solely for data centers and their associated hardware.

Notable Quote:

"Over the next five years, we think that global data center capacity increases by a factor of six times... $3 trillion by the end of 2028 on just the data centers and their hardware alone."
— Andrew Sheats [02:20]

Funding the AI Expansion

Internal Funding from Large-Cap Technology Companies

Sheats identifies large-cap technology firms, often referred to as hyperscalers, as primary potential funders of AI infrastructure. These companies boast substantial cash flows, which Morgan Stanley estimates could cover approximately half of the $3 trillion required. This internal funding leverages their current profitability and market position.

Notable Quote:

"We think large-cap technology companies... may fund half of the spending out of their own cash flows."
— Andrew Sheats [02:45]

External Funding through Credit Markets

The remaining $1.5 trillion needed is expected to come from external sources, with credit markets playing a pivotal role. Sheats outlines several avenues within the credit markets that could contribute significantly:

1. Corporate Bonds:
   Morgan Stanley projects an additional $200 billion in corporate bond issuances tailored to fund AI-related investments. Despite technology companies comprising over 30% of the S&P 500 equity index, they represent only 10% of the investment-grade bond index. This discrepancy suggests substantial untapped potential for bond financing in the tech sector.

   Notable Quote:

   "For corporate bonds, the asset class closest to my heart, we estimate an additional $200 billion of issuance to fund these endeavors."
   — Andrew Sheats [03:10]

2. Asset-Backed Finance (ABF):
   Sheats anticipates significant growth in asset-backed finance, projecting it could supply approximately $800 billion towards the AI investment requirement. ABF offers flexibility and risk mitigation, which is particularly appealing during the initial, high-risk phases of AI development.

   Notable Quote:

   "We think [Asset Backed Finance] may ultimately provide roughly $800 billion of the required funding."
   — Andrew Sheats [03:45]

Challenges and Risks

While the financial prospects are promising, Sheats cautions against potential risks associated with such massive investments:

• Overbuilding:
  There's a danger of constructing more infrastructure than necessary, leading to inefficiencies and wasted resources.

• Technological Shifts:
  Rapid changes in technology could render new investments obsolete before they are fully utilized.

• Operational Constraints:
  Issues like inadequate electricity supply could disrupt the planned economic models and increase operational costs.

Notable Quote:

"The risks... are that more is built than needed, that technology does change, or that more mundane issues like there not being enough electricity change the economics of the endeavor."
— Andrew Sheats [04:10]

Future Outlook

Sheats remains optimistic about the long-term prospects of AI, positioning it as a dominant theme in future investment discussions. He underscores the critical role of credit markets in facilitating the necessary capital investments, likening the current AI boom to past significant capital investment phases funded by credit markets.

Notable Quote:

"AI will be a theme set to dominate the investment debate for years to come. Credit may not be the main vector of the story, but it's certainly a critical part of it."
— Andrew Sheats [04:30]

Conclusion

Andrew Sheats encapsulates the episode by reiterating the essential interplay between technological innovation and financial mechanisms. As AI continues to integrate deeper into various aspects of life, understanding and navigating the funding landscape will be crucial for sustaining its growth and mitigating associated risks.

Additional Information

The episode concludes with a standard disclaimer emphasizing that the content is informational and not financial advice, underscoring the importance of personalized financial considerations.

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Note: This summary is intended to provide a comprehensive overview of the podcast episode for those who have not had the opportunity to listen. It captures the key points, discussions, and insights presented by Andrew Sheats, highlighting the critical financial dynamics underpinning the AI industry's expansion.

Transcript

[A]

Welcome to Thoughts on the Market. I'm Andrew Sheats, head of Corporate Credit research at Morgan Stanley. Today, how the world may fund $3 trillion of expected spending on AI It's Friday, July 25th at 2pm in London. Whether you factor it in or not, AI is rapidly becoming a regular part of our daily lives. Checking the weather before you step out of the house. There is a heat warning in effect. Using your smartphone to navigate to your next destination with real time traffic updates. Writing that last minute wedding speech. An app that reminds you to take your medication or maybe reminds you to power off your device. All of these capabilities require enormous physical infrastructure, from chips to data centers to the electricity to power it all. And however large AI has seemed so far, we really haven't seen anything yet. Over the next five years, we think that global data center capacity increases by a factor of six times. The cost of this spending is set to be extraordinary. $3 trillion by the end of 2028 on just the data centers and their hardware alone. Where will all this money come from? In a recent deep dive report published last week, a number of teams within Morgan Stanley Research attempted to answer just that. First, large cap technology companies, which are also commonly called the hyperscalers, well they are large and profitable. We think they may fund half of the spending out of their own cash flows, but that leaves the other half to come from outside sources. And we think that credit markets, corporate bonds, securitized credit asset backed finance markets, they're going to have a large role to play given the enormous sums involved. For corporate bonds, the asset class closest to my heart, we estimate an additional $200 billion of issuance to fund these endeavors. Technology companies do currently borrow less than other sectors relative to their cash flow. And so we're starting from a relatively good place if you want to be borrowing more given that they're a small part of the current bond market. While technology is over 30% of the S&P 500 equity index, it's just 10% of the investment grade bond index. Indeed, a relevant question might be why these companies don't end up borrowing more through corporate bonds given this relatively good starting position. Well, some of this we think is capacity. The largest non financial issuers of bonds today have at most 80 to 90 billion of bonds outstanding. And so as good as these big tech businesses are, asking investors to make them the largest part of the bond market effectively overnight is going to be difficult. Some of our thinking is also driven by corporate finance. We are still in the early stages of this AI buildout where the risks are the highest. And so rather than take these risks on their own balance sheet, we think many tech companies may prefer partnerships that cost a bit more but provide a lot more flexibility. One such partnership that you'll likely hear a lot more about is Asset Backed Finance, or abf. We see major growth in this area, and we think it may ultimately provide roughly $800 billion of the required funding. The stakes of this AI buildout are high. It's not hyperbole to say that many large tech companies see this race to develop AI technology as non negotiable. The costs of simply competing in this race, let alone winning it, could be enormous. The positive side of this whole story is that we're in the early innings of one of the next great runs of productive capital investment, something that credit markets have helped fund for hundreds of years. The risks, as can often be the case with large spending, is that more is built than needed, that technology does change, or that more mundane issues like there not being enough electricity change the economics of the endeavor. AI will be a theme set to dominate the investment debate for years to come. Credit may not be the main vector of the story, but it's certainly a critical part of it. 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.

[B]

The proceeding content is informational only and based on information available when created. It is not an offer or solicitation, nor is it tax or legal advice. It does not consider your financial circumstances and objectives and may not be suitable for you.