AI spending soared, while returns were under scrutiny
How much is being spent on AI?
The hyperscalers (large-scale cloud computing providers) just made one thing very clear: the AI race is not slowing down. Microsoft, Amazon, Alphabet and Meta are now on track to spend north of $700 billion in capital expenditure in 2026. That number alone tells you everything about how serious this cycle is. Demand is there, capacity is tight, and every player is trying to stay ahead.
The commentary backs it up. Microsoft is already running a $37 billion AI business that’s growing by triple digits. Google’s backlog has exploded past $460 billion. Meta keeps underestimating its own computing needs. Amazon is calling AI the fastest-growing technology it’s ever seen. So the story holds, but the questions are shifting. At this scale, it’s no longer just about growth. Most of that spending is not yet translating into visible economic output, and at some point, cost will matter.
So far this quarter, Google set the tone with what will be the benchmark for others to follow, since it clearly had the best quarter of the bunch. Its stock went up 10% on the news, while Microsoft (-5%), Facebook (-8%) and Amazon (-1%) were all down.
What’s driving the U.S. economy?
On the surface, U.S. gross domestic product looked fine. Growth came in at around 2%; nothing alarming, nothing exciting. Under the hood, it’s a different story. Roughly three-quarters of that growth came from AI-related investment. Data centres, software and equipment tied to computing infrastructure are now doing most of the heavy lifting.
Other parts of the economy are not contributing much. Consumption is holding but not accelerating. This is becoming a more concentrated growth model. It works while the cycle is strong, but it leaves less room for error. If AI spending slows, even modestly, the impact on growth could be meaningful. We believe this is important to keep in the back of our minds, considering the valuations in U.S. stocks.
Did central banks hold their rates?
The Bank of Canada did exactly what everyone expected: rates went unchanged for a fourth straight meeting. The message was cautious and balanced, keeping the door open in both directions. The challenge is obvious: higher oil prices push inflation up in the short term, while the domestic economy remains fragile. Growth is weak, and the labour market is soft (to say the least). However, this is not the kind of inflation you tighten into aggressively. It’s a supply shock, not an overheating economy.
In the U.S., the Federal Reserve (the Fed) is in a similar place. Policy is on hold, inflation remains above target, and recent data does not justify a clear shift. Core pressures are relatively contained, even if headline numbers are lifted by energy. Markets are still leaning toward cuts down the line in the U.S. and a hike in Canada, something we disagree with; we actually believe the opposite might happen. Until then, central banks are waiting and they’re not in a hurry to move.
What’s the next likely catalyst for market shifts?
Earnings season continues, but the biggest stories are already behind us. With the Fed decision made and GDP and inflation numbers out, the next catalysts might become war news once again.
Listen to the latest podcast from the IG Investment Strategy Team for further insights.
