AI Investment Cycle May Have Peaked, Warns Jefferies; India Allocation Hiked to 14%
Jefferies warns of a potential AI investment peak and mid-cycle correction while raising India's portfolio allocation to 14%.
The global gold rush into artificial intelligence may be hitting a plateau. According to a recent report by Jefferies, the AI investment cycle may have already peaked or is currently entering a mid-cycle correction, potentially cooling the feverish spending seen across the technology sector.
The Warning Signs: Capex and Returns
Jefferies suggests that financial markets are beginning to show reluctance in funding further AI-related ventures. The primary concern revolves around whether the massive capital expenditure (capex) by tech giants will actually translate into sustainable returns.
The scale of spending has been astronomical. The four major "hyperscalers"—Microsoft, Amazon, Alphabet, and Meta—saw their combined capital expenditure surge by 108 per cent year-on-year, reaching a staggering USD 202 billion in the third quarter of 2026.
While consensus estimates predict these four companies will spend a combined USD 1.04 trillion next year, Jefferies warns that these expectations may not be met. Rising financing costs and growing doubts over profitability could lead to a shortfall in AI-related spending for 2027.
Economic Impact and Credit Risks
The influence of AI on the broader economy has been significant. The report highlights that AI-related investments contributed 67 per cent (or 1.39 percentage points) to the US real GDP growth of 2.1 per cent during the four quarters ending in Q3 2026.
However, the financial foundation of this growth is showing cracks:
- Widening Spreads: Bond yield spreads for major hyperscalers are widening.
- Credit Risks: Credit default swap spreads for companies like Oracle and CoreWeave have increased sharply.
Jefferies notes that a credit-driven slowdown in AI spending could not only dampen US economic growth but might also force the Federal Reserve to pivot its policy from monetary tightening toward easing.
Diversifying Beyond the AI Supply Chain
With the AI hardware and infrastructure cycle potentially slowing, Jefferies advises investors to look elsewhere. The report suggests exploring sectors where AI is an application rather than the primary product, specifically pointing toward healthcare and biotechnology, where AI-driven drug development holds immense potential.
The India Pivot: Raising the Stakes
Amidst the caution surrounding global tech hubs, Jefferies is doubling down on India. In its Asia-Pacific ex-Japan relative-return portfolio, the firm has raised India's weight by two percentage points, bringing the allocation up to 14 per cent from the previous 12 per cent.
By maintaining an "Overweight" stance on India, Jefferies signals a strong preference for Indian equities even as global investors rethink their technology-driven strategies. In contrast, the report reduced allocations to Taiwan and South Korea by one percentage point each, keeping both markets in "Underweight" positions.