In short
Capital expenditure (capex) for AI infrastructure is becoming a central earnings-season metric across asset classes, with major implications for equities, credit, and potentially Fed policy.
Guests
No guests. Host is Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley.
Key claims
Morgan Stanley estimates U.S. hyperscalers will spend over $600B in 2026 (up from ~half that forecast a year ago), potentially reaching ~$1T annually by 2028. Capex scale drives supplier revenue (notably semiconductors) but also increases corporate borrowing needs, pressuring credit.
Notable examples
Earnings from Alphabet, Amazon, Microsoft, and Meta (nearly $12T combined market cap); U.S. semiconductor stocks up over 30% in the month; record U.S. investment-grade bond issuance in Q1. Mentions Kevin Warsh’s view that investment boosts productivity and lowers inflation.
Written by AI. May contain mistakes. Listen to the episode to check what was said.
Chapters
Tap a time to open that second in VOThe Rise of Capital Expenditure
0:45 to 2:06
Discussion on the increasing importance of capital spending in earnings reports.
“Yet while the focus of earnings season is traditionally about earnings, another line item is rapidly rising in importance.”
Implications of Increased Spending
2:06 to 3:23
Analysis of how capital expenditures affect market dynamics and borrowing needs.
“In other words, as big as these numbers may seem, much of the spending story still lies ahead.”
Investment and Monetary Policy Links
3:23 to 4:20
Exploration of the relationship between corporate investment and monetary policy.
“The results we got yesterday certainly hint at a continuation of this trend.”
Transcript
Automatic transcript. May contain errors.0:00Andrew Sheets:Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley. Today, why capital expenditure is rapidly becoming one of the most important numbers in earnings season across asset classes. It's Thursday, April 30th at 2 p.m. in London. This is a high-risk episode in the sense that it may already be obsolete by the time that you hear it. But then again, maybe that's fitting for a discussion of record capital spending on cutting-edge technology. We are in the middle of the busiest part of earnings season, and yesterday, four of the largest companies in the world reported numbers.
0:40Andrew Sheets:These companies, Alphabet, Amazon, Microsoft, and Meta, have a combined market cap of nearly$12 trillion. Yet while the focus of earnings season is traditionally about earnings, another line item is rapidly rising in importance. Capital spending on AI infrastructure, the chips, power, cooling, and connections that are required to build and run AI models, is soaring. And the companies that reported yesterday are at the leading edge of this trend. The first thing about all this spending is simply the scale. For this year alone, Morgan Stanley estimates that it will amount to over$600 billion across the largest U.S.
1:20Andrew Sheets:hyperscalers. To put that in perspective, that means just a handful of U.S. tech companies are now set to spend almost as much on capital and equipment this year as every non-technology company in the S &P 500 did in 2025. And as big as that spending is, it's been accelerating. That over$600 billion spending number that we forecast for 2026, well, a year ago, we thought it would be roughly half that, and that estimate was well above consensus at the time. U.S. companies have repeatedly guided their spending higher as they seek to capture the AI opportunity, and we think that continues. By 2028, my Morgan Stanley colleagues estimate that this U.S.
2:05Andrew Sheets:hyperscaler capital spending could hit an annual rate of$1 trillion. In other words, as big as these numbers may seem, much of the spending story still lies ahead. All of that investment, both recently and in the future, has big implications. First, one company's spending is another company's revenue, and many of the stock market's recent winners have been directly tied to this historic build-out. As of this recording, U.S. semiconductor stocks have risen over 30 % this month alone. Second, while these large U.S. tech companies have enormous financial resources, this spending is at a scale that still requires significant borrowing.
2:46Andrew Sheets:Our credit strategy teams expect record bond issuance this year, with U.S. tech borrowing a big part of that. And so far it's playing out. The first quarter was the busiest quarter for U.S. investment-grade bond issuance on record. Which brings us back to these recent earnings and a dilemma that seems negatively skewed for credit relative to equities. If these companies continue to sound confident about their capital spending plans or even raise expectations further, that could support AI suppliers and the broader equity market. But it would mean even more borrowing needs to be absorbed by the corporate bond market, a credit negative.
3:24Andrew Sheets:The results we got yesterday certainly hint at a continuation of this trend. On the other hand, if capital spending is guided down, that could undermine a key pillar of recent market strength and broader risk appetite, which could drag credit wider by association. In the near term, the risk reward seems better in other parts of fixed income, such as mortgage-backed securities. The implications of yesterday's results may also extend to the Federal Reserve. As we discussed last week, Kevin Warsh, nominee to be the next Fed chair, believes that large levels of investment can boost productivity, lowering inflation and thus justifying lower interest rates.
4:06Andrew Sheets:And so what these large spenders do, how confident they feel about the future, and what all of this spending can ultimately deliver, well, the implications of that may extend even into the monetary policy story. Thank you, as always, for your time. If you find Thoughts of the Market useful, let us know by leaving a review wherever you listen, and also tell a friend or colleague about us today.
4:32The preceding content is informational only and based on information available when created. It is not an offer or solicitation, nor is it tax or legal advice. It does not consider your financial circumstances and objectives and may not be suitable for you.
From the publisher
Capital spending usually signals how a company is positioning itself for the future. Our Global Head of Fixed Income Research Andrew Sheets explains why this metric is getting more attention from investors.
Read more insights from Morgan Stanley.
----- Transcript -----
Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley.
Today: Why capital expenditure is rapidly becoming one of the most important numbers in earning season across asset classes.
It's Thursday, April 30th at 2pm in London.
This is a high-risk episode in the sense that it may already be obsolete by the time that you hear it. But then again, maybe that's fitting for a discussion of record capital spending on cutting edge technology.
We are in the middle of the busiest part of earning season, and yesterday four of the largest companies in the world reported numbers. These companies – Alphabet, Amazon, Microsoft, and Meta – have a combined market cap of nearly $12 trillion.
Yet, while the focus of earning season is traditionally about earnings, another line item is rapidly rising in importance. Capital spending on AI infrastructure – the chips, power cooling, and connections that are required to build and run AI models is soaring. And the companies that reported yesterday are at the leading edge of this trend.
The first thing about all this spending is simply the scale. For this year alone, Morgan Stanley estimates that it will amount to over $600 billion across the largest U.S. hyperscalers. To put that in perspective, that means just a handful of U.S. tech companies are now set to spend almost as much on capital and equipment this year as every non-technology company in the S&P 500 did in 2025. And as big as that spending is, it's been accelerating.
That over 600 billion spending number that we forecast for 2026? Well, a year ago we thought it would be roughly half that, and that estimate was well above consensus at the time. U.S. companies have repeatedly guided their spending higher as they seek to capture the AI opportunity. And we think that continues.
By 2028, my Morgan Stanley colleagues estimate that this U.S. hyperscaler capital spending could hit an annual rate of $1 trillion. In other words, as big as these numbers may seem, much of the spending story still lies ahead.
All of that investment, both recently and in the future, has big implications. First, one company's spending is another company's revenue, and many of the stock markets recent winners have been directly tied to this historic buildout.
As of this recording, U.S. semiconductor stocks have risen over 30 percent this month alone.
Second, while these large U.S. tech companies have enormous financial resources, this spending is at a scale that still requires significant borrowing. Our credit strategy teams expect record bond issuance this year, with U.S. tech borrowing a big part of that.
And so far, it's playing out. The first quarter was the busiest quarter for U.S. investment grade bond issuance on record. Which brings us back to these recent earnings – and a dilemma that seems negatively skewed for credit relative to equities.
If these companies continue to sound confident about their capital spending plans or even raise expectations further, that could support AI suppliers and the broader equity market. But it would mean even more borrowing needs to be absorbed by the corporate bond market, a credit negative. The results we got yesterday certainly hint at a continuation of this trend.
On the other hand, if capital spending is guided down, that could undermine a key pillar of recent market strength and broader risk appetite, which could drag credit wider by association. In the near term, the risk reward seems better in other parts of fixed income, such as mortgage-backed securities.
The implications of yesterday's results may also extend to the Federal Reserve. As we discussed last week, Kevin Warsh, nominee to be the next Fed Chair, believes that large levels of investment can boost productivity, lowering inflation, and thus justifying lower interest rates.
And so, what these large spenders do, how confident they feel about the future, and what all of this spending can ultimately deliver – well, the implications of that may extend even into the monetary policy story.
Thank you as always, for your time. If you find Thoughts of the Market useful, let us know by leaving a review wherever you listen. And also tell a friend or colleague about us today.