Ketu Desai
By Ketu Desai
The AI boom continues to be the driver of both economy and markets. In total, global AI spending is running at nearly $1.5 trillion and is expected to rise 37% in 2026 to nearly $2 trillion. This has led to some eye-popping results during earnings season. Google grew its cloud business by 34%, generating more than $100bn in a quarter, with another $155bn in backlog. Microsoft grew its cloud business by 40%, stating demand remains significantly ahead of capacity. Taiwan Semiconductor reported 39% earnings growth and raised guidance to mid-30%.
Vertiv (making cooling systems for data centers) reported 63% earnings growth. GE Vernova (electrification company) reported a 55% increase in orders. Nvidia supplier SK Hynix reported a 62% increase in operating profit. Samsung’s chip business drove a doubling of profit. The datacenter buildout drove Caterpillar’s 10% growth. Even utilities such as Constellation, Vistra, and American Electric Power are showing growth prospects. Data points from across the supply chain are telling us that it’s too early to fade the AI boom.
In recent weeks we have gotten plenty of new AI related announcements. Anthropic launched Claude 4.5, which can autonomously code. Amazon’s robotics team is working towards automating 75% of the company’s entire operations. Goldman Sachs announced “OneGS 3.0” in which it will use AI in sales and client on-boarding, lending processes, regulatory reporting, and vendor management. Google’s Veo 3 and Nano Banana can now create video and images on demand without a production crew. OpenAI’s Sora 2 can do something similar.
Google Health can now analyze mammograms with high accuracy to help early detection of diseases. Coca-Cola announced its AI sales forecasting system helped improve forecasting accuracy by over 20%. Rocket Mortgage increased output by 6x from using AI in its underwriting process. GM is launching Google Gemini in its vehicles next year, which will eventually let users drive hands free while taking their eyes off the road. BMW is using an AI solution called SORDI.ai to create digital twins of its supply chain for thousands of simulations, optimizing industrial planning.
PayPal announced that users can now allow AI agents to complete payments on their behalf. Nvidia made several announcements during the month, including partnering Uber and Stellantis to build a fleet of 100,000 autonomous taxis. Eli Lilly is building a supercomputer with Nvidia to accelerate drug discovery and development. Walmart announced new AI shopping tools for the holiday season that are expected to drive shoppers to spend 25% more on average
It’s not hard to see that AI is impacting every industry, and at a pace that is faster than previous technological innovations.
While the AI boom continues, credit concerns are surfacing in other parts of the economy. The bankruptcies of First Brands and Tricolor (both auto-related) have been brought to the forefront credit underwriting concerns at private credit firms, BDCs, and certain banks. Banks such as Jefferies, the PE and private credit firms, and BDCs saw significant selloffs in their stock. While broader credit spreads remain in line with where they have been and most banks reported lower credit loss provisions, the bankruptcies are a reminder of the risks of private credit.
The industry has grown by nearly 10x, from $250bn in 2008 to nearly $2 trillion. With all that growth, the competition for deals is fierce. It could lead to a situation where underwriting standards are relaxed, with reduced protections, limited covenants, more PIK deals. The quality of the borrower could also decline in a chase for deals. Many of these deals are floating, and as the Fed cuts, returns could be lower. A chase for deals could eventually mean that a private credit investment becomes a private equity one. A KKR partner recently said, “There are 19,000 PE funds in the US. There are 14,000 McDonald’s in the US. How are there more PE funds than McDonald’s?”
Maybe the oversupply and “bubble” isn’t in AI but in private markets?
The impact of a potential oversupply in private markets is a major secular capital flow into public ones from large institutional investors. Private markets boomed after the Great Financial Crisis, as institutional investors did everything to avoid equity market beta. The S&P outperformed private markets on all time horizons without the leverage and better liquidity. Further, private market investors are not getting exits and distributions. With rates no longer zero and increased competition, forward returns in private markets will be more difficult.
Harvard and Yale are selling private market investments below net asset value. Despite the AI boom, venture capital has had a negative return over the last 3 years, while Nasdaq 100 (QQQ) is up over 100%. Jamie Dimon said on JPM’s earnings call that, “You may have seen peak private credit.” Private market fundraising has been down 37% over the last 3 years. You can tell alternative asset managers are struggling as they are increasingly trying to raise money from retail. As institutional investors start getting their capital back from alternative asset managers, they will put that money to work in the S&P and public equity markets. You get better liquidity, transparency, and exposure to the biggest and best companies in the world that are benefiting from AI.
Looking forward, the market will focus on the latest from China & US meetings, Washington DC, earnings, and economic data.
