By Jamie Chisholm
The trend of 'capex recycling' is considered a problem by TS Lombard analyst
A smartphone displaying the logo of the U.S. artificial intelligence safety and research company Anthropic. Anthropic's looming IPO may be another signal of a market top.
Stocks hit another record high this week. There's been some sector rotation taking place in recent sessions, though it remains the case that much of the market's gains of late have been driven by optimism over artificial intelligence.
Dario Perkins, economist at TS Lombard, says the bulls are premature in claiming they have won the AI capital expenditure debate, and besides, two looming factors suggest a market pullback is likely.
In an analysis published Thursday, Perkins notes that there was a time last year when investors began to worry about the sustainability of AI capex; asking whether the potential returns justify the vast expenditures. &#34;But today those worries have disappeared. With revenues and stock prices surging, the bulls are ready to declare victory,&#34; he says.
However, Perkins believes the debate about the sustainability of AI capex is far from settled. &#34;That's because most of what we are seeing - in terms of both revenues and the various bottlenecks across the tech ecosystem - is still the result of capex recycling,&#34; he says.
For example, Perkins says that hyperscalers are booking large multi-year orders from companies that don't currently earn enough to meet those obligations. He notes that 50% of the combined orders backlog of Microsoft (MSFT), Oracle (ORCL), Google (GOOGL) and Amazon (AMZN) comes from OpenAI and Anthropic.
&#34;At the same time, the hyperscalers are making large, direct investments in those same companies and - as the values of those investments rise -booking those gains as additional income,&#34; he says. This is the &#34;other&#34; category in those companies earnings statements, which explains a large portion of their first-quarter earnings surprise.
As long as the hyperscalers keep investing more funds in building data centers, revenue across the industry will continue to rise. &#34;That's fine in the short term - right now those companies plan to keep doing this, so there is plenty of momentum - but it leaves the entire industry highly exposed to any slowdown in capex,&#34; he says.
And a problem for market bulls is that such a capex reduction may coincide with two classic markers that Perkins believes usually accompany a market top; insider selling and monetary tightening.
He recalls the dot-com era, when a wave of IPOs marked the peak of the bubble in early 2000. &#34;Indeed, numerous studies have demonstrated a causal link between insider selling and the end of the dot-com mania, with venture capitalists and angel investors using the IPOs to dump their holdings on an unsuspecting public (once their obligatory 'lockup' periods expired),&#34; says Perkins. For this bull market, the IPO surge will soon feature SpaceX (SPCX), Anthropic and OpenAI.
Tighter monetary policy was also a factor around the deflating of the dot-com bubble, Perkins notes. An uptick in inflationary pressures have shifted the stance of many central banks. The Bank of Japan and European Central Bank are expected to raise interest rates this month, and markets continue to price in the probability that the next move by the Federal Reserve will be a rate hike, too.
The AI capex trade has momentum on its side, but it hasn't yet done enough to justify today's lofty expectations, according to Perkins. And that leaves the market vulnerable as the two markers of an asset-price cycle peak also loom.
&#34;That doesn't mean a market crash is imminent, but it should at least raise questions about the durability of this latest melt-up,&#34; Perkins says.
The markets
U.S. stock-index futures (ES00) (YM00) (NQ00) are mostly lower as Treasury yields BX:TMUBMUSD10Y dip. The dollar index DXY is down, as oil futures (CL.1) dip and gold futures (GC00) trade around $4,490 an ounce.
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The buzz
S&amp;P Dow Jones Indices has decided against policy changes that would have allowed SpaceX (SPCX) and other big technology companies to see quicker index entry after their initial public offerings.
The U.S. nonfarm payrolls report is released at 8:30 a.m. Eastern. Economists expect a net 80,000 positions were added in May, down from 115,00 the month before. The unemployment rate is expected to remain the same at 4.3%.
Other U.S. economic data due Frida include the April reading on consumer credit, published at 3:00 p.m.
South Korea's Kospi index KR:180721 fell sharply after the country's labor minister called on the country's major tech firms, such as Samsung (KR:005930) and SK Hynix (KR:000660), to share the spoils of their profits.
Shares of lululemon athletica (LULU) are sliding after management trimmed the athleisure group's full-year outlook.
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06-05-26 0640ET

TS Lombard economist Dario Perkins warns that despite AI-driven market highs, two classic signs of a market top are emerging: 'capex recycling' and looming insider selling via major IPOs like Anthropic. He argues current revenues rely on hyperscalers investing in each other's ventures, creating vulnerability to capex slowdowns. Additionally, tightening monetary policy mirrors dot-com era conditions, suggesting the rally may lack durability.

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Bulls declare victory on AI, but two classic signs of a market top are looming