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Strategy: Tracking Tech's Tectonic Transformation
Zachary Griffiths, CFA - Head of IG & Macro Strategy, CreditSights
Jordan Chalfin, CFA - Head of Technology, CreditSights
Andy Li, CFA - Senior Analyst, Technology, CreditSights
Winnie Cisar - Global Head of Strategy, CreditSights
EXECUTIVE SUMMARY
- Despite the revelation that Deepseek, a China-based AI startup, was able to produce a model comparable to US-based competitors for a fraction of the cost, hyperscalers remain committed to considerable AI-related capex. Of the roughly $350 billion of capex planned by the top four hyperscalers in 2025, we estimate ~$200 billion of that is AI-related.
- While capex plans are unlikely to change in the next 1-2 quarters, we think there could be a digestion phase in spending as early as the second half of the year. Even before the Deepseek revelation, we were concerned about excess spending on AI, which has dwarfed monetization from AI applications.
- Between the U.S. economy, equity markets and credit markets, equity markets are by far the most exposed to tech. The Mag 7 comprise roughly one-third of the S&P 500 and more than half of the Nasdaq by market capitalization. Recent growth in passive investing through ETFs have left households potentially overly exposed to the tech sector. This could cause a broader shift in risk sentiment should we see a correction in tech equity valuations.
- Tech investment/spending comprises just 9% of GDP at right around $2 trillion in 2024. While it is a relatively small portion of overall economic growth, it has more than doubled the pace of growth in overall business fixed investment since the early 2000s (5.9% vs. 2.9%). The U.S. economy has grown at a 2.2% annualized rate over that timeframe.
- Credit markets are more insulated from a potential deflating of the “AI premium” currently in tech equity market valuations. The IG tech sector comprises just 6.5% of the overall IG index, while the Mag 7 are just 2.4% of the overall index. That being said, we think a broader shift in risk sentiment driven by a tech equity selloff would likely cause a modest repricing of overall credit risk, pushing spreads off recent tights.
Despite a flurry of policy headlines since the Trump administration took office on Jan. 20, US financial markets are off to a strong start to the year. Risk sentiment faded only briefly on the news that Deepseek, a China-based AI startup, was able to produce a model comparable to US-based competitors at a fraction of the cost. While Deepseek has been a known entity for some time, favorable reviews of its model’s performance over the weekend of Jan. 25-26 drove a meaningful, though short-lived, correction. On Monday, Jan. 27, the information technology sector dropped 5.6% (a 3.8 standard deviation move using a 1y lookback of daily changes), pushing the S&P 500 1.5% lower on the day (chart below, left panel). NVDA and ORCL fared the worst, declining 17% and 14%, respectively, but have since recovered large chunks of those losses.
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