Wall Street giant Morgan Stanley Wealth Management is sounding the alarm over the stock market’s growing dependence on artificial intelligence capital expenditures.
The firm’s chief investment officer, Lisa Shalett, warns that the current rally represents a “one-note narrative” that could be nearing its end.
Since ChatGPT launched in November 2022, AI data center ecosystem stocks have accounted for roughly 75% of S&P 500 returns, according to Morgan Stanley data.
That same group of stocks has been responsible for approximately 80% of earnings growth and 90% of capital expenditures growth over that same period.
The S&P 500 has gained a robust 90% since November 2022, a run Morgan Stanley attributes almost entirely to the AI investment boom.
Shalett argues that the conditions underpinning that extraordinary rally are now showing meaningful signs of deterioration and potential reversal.
“While most bullish outlooks are premised on economic re-acceleration, it’s difficult to ignore the market’s reliance on AI [capital expenditures],” Shalett said in the firm’s report.
“In market-pricing terms, we believe we’re closer to the seventh inning than the first, and several developments indicate we may be entering the later phases of the boom,” she added.
Among the warning signs Morgan Stanley identified, AI hyperscaler free-cash-flow growth has notably “turned negative,” raising questions about sustainability.
The firm also flagged accelerating price competition in what it describes as the “monopoly-feeder businesses” supporting the broader AI infrastructure buildout.
Shalett drew a striking historical parallel to the dotcom collapse, warning that a prolonged AI spending pause could produce an outcome described simply as “not pretty.”
She referenced the potential for a “Cisco moment,” pointing to the network gear maker’s 80% stock plunge when the dotcom bubble burst in 2000.
While Morgan Stanley does not expect such a collapse immediately, Shalett cautioned that the market could face a comparable reckoning within the next 24 months.
Investors and market watchers will be closely monitoring AI capital expenditure trends in the coming quarters as the key indicator of whether this rally has more room to run.
