Investors position for a slowdown in AI capex growth

TL;DR:

• UBS estimates hyperscaler capital spending will rise 76% to $673 billion (about £500 billion) this year, but sees growth slowing to 25% in 2027 and just 6% in 2028.
• Bank of America’s July survey found 82% of fund managers call semiconductors the market’s most crowded trade; some active managers are rotating into hyperscalers, software and healthcare.
• Debt-market appetite is cooling too, with cover ratios on Big Tech bond issuance falling from nearly 5 times in February to below 2 in July.

The trade that defined two years of markets — buy the companies selling AI infrastructure — is being quietly unwound by some of its participants. With UBS forecasting hyperscaler capex growth will collapse from 76% this year to 6% by 2028, active managers are trimming chip exposure and buying the spenders instead: Microsoft, Amazon, Alphabet and Meta have lagged the very rally their budgets financed.

The crowding is extreme. Bank of America’s July fund manager survey found 82% naming semiconductors the most crowded trade, with nobody reporting a short position. The Philadelphia Semiconductor Index has more than doubled in a year even after an 18% drop from its June peak. Yet money is still arriving — chip-focused funds drew a record $10 billion of net inflows through May, per Morningstar.

The financing picture explains the caution. Hyperscalers have shifted from funding datacentres out of cash flow to leaning on debt markets, and demand for that paper is softening: Apollo’s Torsten Slok notes bond cover ratios have fallen from nearly 5 times to under 2 since February. The Bank for International Settlements warned in June that disappointing returns could turn the capex boom into a protracted bust.

Why this matters for the UK pipeline

The UK’s datacentre build-out sits downstream of exactly this cycle. Projects such as Nscale’s grid-delayed £2 billion campus and Xlinks’ contested £13 billion Devon site assume sustained hyperscaler demand — and face the same local opposition now stalling US projects, where New York has just imposed a one-year moratorium.

Looking forward

Fidelity’s Jurrien Timmer recalls that the internet-era leaders absorbed repeated 20-30% falls before resuming their climb, and buy-side spending forecasts still sit above analyst estimates. Earnings-season capex commentary from the big four will decide which reading wins.