Key takeaways

All about AI.  U.S. hyperscaler capital expenditures on information equipment, software, and data centers are estimated to reach nearly $800 billion for 2026, continuing to support the economy even as some traditional cyclical indicators soften. In Q1 (the latest period for which the data is available), tech capex accounted for roughly half of the positive contributors to U.S. GDP growth.[1]

Markets are shifting and broadening within AI. With the mega-cap hyperscalers now spending virtually all of their once-abundant free cash flow on AI capex, the bulk of the earnings and share-price gains have shifted to their suppliers[2]. Order backlogs may insulate these semiconductor, memory, and infrastructure companies in the near term, yet they, too, could be at risk if the AI flywheel doesn’t start driving more productivity gains before a wave of new capacity comes online.

The AI boom has become a household story as well. Stocks now represent a historically high share of US household net worth, eclipsing real estate for the first time.¹ This wealth effect has supported spending. It has also heightened the potential vulnerability if equity markets wobble.

Headline inflation pressures may be easing, but keep an eye on core inflation. Energy prices moderated following a de-escalation of Middle East tensions (though before the recent restart of hostilities). While this has helped reduce headline inflation, all-important core inflation (which strips out energy and food prices) remains sticky.[3] The Fed will be sensitive to softening employment data, but a hike remains on the table.

Bullish on the AI supercycle over the long term, but managing risk by limiting concentration near term. The AI buildout has entered a critical phase in which investors will look for evidence that large-scale spending yields measurable efficiency improvements across industries. We think they will increasingly find it; how soon remains an open question. In the meantime, we are focused on quality and the increasing breadth within the AI trade, including in late-stage private markets.

The attached PDF is a summary of Pathstone’s full report, which is available to clients upon request.