Macro Minute: Week of August 25, 2025
I know that I have been AI heavy for the past few weeks, but I can’t help but comment on the article my friend, Harris Kupperman (Kuppy), wrote last week. In the previous weeks I have talked about how the technology of AI is and will continue to revolutionize the world. Kuppy does a great job discussing the investment implications of what he sees going on with the large CapEx spending budgets at these large corporations.
To set the stage, let us remember that roughly 25% of the S&P 500 is comprised of Meta, Microsoft, Google, Amazon, and Nvidia. The first four of those companies are the ones footing most of the bill for the AI buildout and Nvidia is the prime beneficiary of that spend. The MSCI World index isn’t much better with nearly 19% being in these five companies.
Now let’s dig into Kuppy’s article. Kuppy is a longtime market participant that has lived through many cycles. He acknowledges how awesome tech is at productivity enhancement. Anyone around in the late 90’s remembers how the internet made things achievable for the average person that once required great wealth. Kuppy describes how through the internet he was able to communicate with individuals on the other side of the world for free while he still had to pay a roaming charge to call someone the next county over. Mind-blowingly revolutionary.
Where Kuppy starts to wave a huge caution flag is when he starts putting numbers to the CapEx spend. When factoring in the cost of the build out, the lifespan of the equipment, and the ongoing cost of the energy use, just how much revenue is needed to breakeven on this spend? Kuppy uses some back of the napkin math and concludes that revenues would need to increase around ten-fold from where we are currently. That is assuming that the CapEx spend stays the same and doesn’t increase. Again, that is to just cover the annual depreciation cost. Put into laymen terms, the current trajectory of spending doesn’t add up.
Kuppy draws upon his historical experience of three other times in history where large CapEx spending begot ever more CapEx spending to maintain current revenue streams. The first everyone knows. It is the dot com bubble. Anything with a URL was given a premium price in 2000 until investors wizened up. The next example is the shale oil and gas boom and bust of 2014. Oil and gas extracted through shale requires ongoing investment to keep current production levels. The final example he references is cannabis in 2019. Another example of investor sentiment that ran the share prices of the companies up in the hope of revenue that has not come to fruition.
I want to end with just quoting the end of the article.
“The datacenters will be built, the chips will hum, and some of the capacity will eventually prove mind-blowingly useful. But the investors footing the bill today will regret ever making the investment. That’s how bubbles end—not with a bang of innovation, but with the slow, grinding realization of negative returns, for years into the future. When shareholders finally wake up to the fact that AI isn’t generating cash flow, only burning it, the guillotine will fall—on management, on the stocks, and on the broader market that bet its future on a fantasy.
Caveat Emptor…”
While I may be less skeptical than Kuppy, I certainly agree that you must be aware of the risks these companies bring. Not only as investments in these companies alone, but to the larger market because they are so heavily represented in the indices. This is why I have personally differed from index returns over the last few years. I have consciously decided that it is not worth the risk to be heavily weighted into these companies even though they have had spectacular returns, and everyone is talking about them. To me, I find more comfort in staying diversified so that it allows me to stay invested if these risks ever manifest.
I hope you have found the last few weeks enlightening, because I have certainly learned a lot from writing them. Ultimately, I think AI is going to be breathtakingly revolutionary, I just don’t want to be the guy left with the bar tab at the end of the night to finance it.
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