Ketu Desai
By Ketu Desai
We are back to the pre-war playbook of an AI datacenter boom and manufacturing renaissance. While both fiscal and monetary stimulus are hitting the economy, the driver of growth remains a massive AI CapEx boom. Large cap tech alone will spend over $700bn this year or nearly 2% of GDP, which is a fairly good starting point. News of Anthropic’s Mythos marks an important milestone for AI’s progress (and raises significant concerns). It reinforces the point that AI agents are here and force executives to spend for longer periods. Google’s Cloud CEO said, “I think for the next 10 years, there will always be more demand than supply… there’s always a shortage, there’s never enough.”
This spending is exploding demand for a compute-powered economy. OpenAI’s President sums it up well by saying, “I think we are heading to this compute-powered economy. There’s not going to be enough compute in the world to meet the demand.” Uber is a great example of this problem, as their CFO said, “I’m back to the drawing board, because the budget I thought I would need is blown away already.” This was said in April 2026, and they had already used their entire annual budget. Google’s token demand is up 60% over the last quarter. The hourly rental rate for one of Nvidia’s most advanced Blackwell chips is up 48% over the past two months. Meta is extending the useful life of servers due to a significant supply deficit.
The supply side remains constrained across the value chain from energy to compute. GE Vernova reported that its order book is up 71% and are now sold out through 2028. SK Hynix chairman said the chip shortage is likely to persist into 2030 with the short fall exceeding 20%. Corning’s earnings more than doubled. Teradyne reported 87% growth in its semiconductor business. Even Texas Instruments reported 90% growth in its datacenter business.
ASML’s (an early cycle indicator) CEO said, “Both our Memory and Logic customers are responding to this unprecedented demand by increasing capital expenditures and accelerating capacity expansion plans this year and beyond. Those investments are supported by long-term agreements with their own customers… I think I mentioned before, we see our customers having a lot less hesitation to really accelerate their capital expenditure.”
The stimulative impacts of the “OBBB” are starting to hit the economy beyond AI. The longer-term impact will come from an immediate expense of capital expenditures. There has been $5.1 trillion in investment commitments to bring manufacturing back. While not all of it will come through, immediate CapEx expensing from the “OBBB” will serve as an incentive this year. Business investment is expected to increase by 5.5% as well. Commercial and industrial loans are up 7.4%, the biggest jump in years.
United Rentals, which rents various construction and industrial equipment, is a good bellwether for expanding manufacturing and industrial activity. United Rentals’ stock was up 20% post-earnings after beating earnings and raising guidance. Vulcan Materials, another early cycle indicator, reported 7.4% revenue growth. The manufacturing renaissance has also begun to reflect in the macro data. as durable goods orders gradually accelerated last month.
The latest PMI Manufacturing Index hit its highest level in years, and certain regional manufacturing data is exploding. For example, the most recent Philadelphia Fed’s Manufacturing Index crushed expectations while Richmond and Dallas Fed’s Index saw new orders hitting their highest levels in years.
Industrials are at the intersection of the AI boom and manufacturing renaissance. They benefit from most major secular themes ranging from increased global defense spending, AI and infrastructure buildout, increased focus on domestic manufacturing, on shoring / regional supply chains, and a new aerospace cycle. Industrials will have the second highest earnings growth next year, expanding into the high teens.
These companies benefit both from the AI buildout and margin expansion from AI implementation. Industrials outperform when PMIs bottom and turn up. In particular, when PMIs are less than 47 and turn up, the 12M forward return has historically been 22%, with a 95%-win ratio. Within industrials, transports are in a sweet spot. Capacity has been taken out of the system for years, while demand is growing with the manufacturing renaissance, leading to pricing power.
JB Hunt’s conference call sums it up well, “What we’re seeing is a freight market that has fundamentally less slack than it did in prior cycles. Capacity has been steadily exiting for an extended period, driven by regulatory enforcement, rising costs, and financial performance that does not support capital reinvestment. Even if spot rates increase, capacity continues to lead the industry.”
CSX, for instance, not only has pricing power to drive topline, but is also seeing significant margin expansion through efficiency and technology. They grew earnings 26%, expanded margins by 560 bps, guided to another nearly 300 bps of margin expansion and 60% free cash flow growth. Similarly, Union Pacific reported that free cash flow margin was up to 24.2% from 7.8%. Old Dominion reported revenue per shipment up 5.9%. They trade cheaper than market multiple for double digit growth. Positioning is light, as most investors are focused on tech with hedge funds net-sold in 10 of the last 12 weeks.
Norfolk Southern reported a mixed quarter but stock moved positively; an indication of the positioning within the group. Technically, they broke out of a nearly 5-year base, retested during the March correction, and now breaking out. Historically, when we have had similar returns for transports, the forward return one-year out is 17% on average with a 98%-win rate. Transports breaking out and hitting all-time highs is one of the best leading indicators of economic momentum.
Looking forward, the market will focus on geopolitics, earnings, the latest in AI, and the Fed.
Ketu Desai is the Principal of i-squared Wealth Management Inc. (www.isquaredwealth.com), an investment management firm based in New Jersey. ketu@isquaredwealth.com
