AI's Capital Spending Slowdown Looms as a Time Bomb for U.S. Stock Market

Recent insights from analysts highlight a potential threat looming over the U.S. stock market: a significant slowdown in AI capital expenditures. According to a report, if data center capital spending were to decrease by 20% over the next two years, it could impose a 3-4% decline in corporate earnings for the S&P 500, and more dramatically, lead to a valuation contraction of 10-13%.

Three critical "time bombs" have been identified in the report as major risks: advancements in AI models could render current computing resources excessive; increasing power shortages present physical limitations to data center construction; and when capital expenditure growth surpasses cash flow generation, it exposes companies to financing stress.

Despite the robust foundation of AI investment themes, the report warns that the deceleration of data center spending could become a significant systemic risk for the U.S. stock market. Investors have so far enjoyed substantial gains, driven primarily by expanding valuations of AI-related stocks from 2023 to 2025. However, any disruption to this growth narrative might first reflect in valuation reductions.

The report envisions a bearish scenario where the rapid evolution of AI technology could undermine infrastructure needs. As AI models enhance their efficiency, existing facilities might experience severe underutilization, echoing the "dark fiber" period of the dot-com bubble.

Power shortages are another tangible threat. Data centers' substantial energy consumption burdens the aging U.S. power grid. With future electricity demands expected to triple current levels by 2028, any constraints might necessitate a slowdown in data center investments, despite attempts to mitigate this through alternative power sources.

Financially, while large tech firms currently manage to fund capital expenditures with operational cash flows, the proximity of this balance is tightening. Should internal cash flows fall short, the reliance on external financing could jeopardize financial stability, especially as venture capital funding shows signs of depletion.

Significantly, the report underscores AI investment's integral role in driving U.S. economic growth. Any synchronization of a broader economic downturn with a slowdown in AI capital spending could exacerbate conditions, posing a more profound threat to the equities market than mere sector adjustments.

Analysts caution that while the immediate EPS impact may be moderate, potential valuation compressions could be severe. They urge investors to monitor these risk factors closely and consider hedging strategies to mitigate possible declines.