One week / one topic: Fasten your seatbelts

What happened?

The ‘AI or die’ race is entering warp speed.

Net equity supply is therefore turning positive after years of contraction, as hyperscalers transition from cash accumulators to heavy spenders.

In particular, Alphabet’s recent $85bn secondary issuance stands out for its strong signaling implications.

Since the company currently sits on ~ $130bn in cash and its recently issued debt was quickly snapped up by investors, why would it sell shares now?

It’s hard not to think that the Alphabet’s management:

• See the share price as richly valued

• Want to tap markets before the upcoming SpaceX, Anthropic and OpenAI IPOs

• Aim to retain the ability to further leverage the balance sheet by issuing more debt in the future

Given that we have two barely controlled AI races – one between a handful of companies, and the other between two superpowers – this trend is likely to continue.

(As of Friday, Meta was reported to have similar intentions to raise equity. The stock price tanked in short order)

As mentioned, once you add in the planned IPOs, net equity supply is very likely going to turn positive for 2026.

The problem? Someone must buy all these shares… at what are likely going to be expensive valuations.

Importantly, the fact that positive net equity issuance has historically coincided with weaker performance doesn’t really feel like a coincidence…

Therefore, US return on equity – already at 20% and near record highs – looks increasingly fragile since:

• The amount of equity (denominator) is going up due to primary (IPOs) and secondary issuance, and

• Corporate profits (numerator) might struggle to keep up, as gargantuan AI capex is front-loaded.

Add higher-than-usual inflation and a fading fiscal impulse to the mix, and all of a sudden you realize that the party might not last forever…

Granted, there are of course also strong reasons to remain constructive.

Hard data has been markedly improving and the US labor market remains quite resilient – as you would expect in the middle of ever-rising corporate earnings expectations.

But in the end… What gives?

Our observations

• Fundamentals: Despite markets being undeniably enthralled with AI, the technology does have the potential to be transformative – and not just a fad.

  In that case, we are probably better off trying to take the market’s temperature in terms of risk appetite. ‘Ebullient’, I’d say… until Friday.

• Price action: For all the talk about model wars and hyperscalers trying to outspend each other, open-source AI is arguably only ~4 months behind cutting-edge/frontier models.

  Importantly, routine tasks don’t require inconveniencing the Zeus of AI divinities, when a free tool will suffice. Non-US Tech is outperforming then, as the gains might not accrue to the hyperscalers in the end.

• Investor beliefs: Honestly, who knows what to believe anymore?

  If you feel adrift in an ever-shifting landscape where everything seems to change ever faster, chances are that many investors feel the same way…

So what?

Sometimes you can pick your battles, sometimes you can’t.

In the case of Tech and AI, you are squarely in the latter camp. It is simply too big to ignore.

If anything, I have recently heard claims that – as an investor – you have to understand Tech investing, given how pervasive the theme and its wider implications are.

Maybe… Probably… Most likely, yes. Fine.

That said, this does not automatically mean that buying anything AI-related will turn out to be a good investment. (If only)

Which is why – as much of the currently bullish mood can be ascribed to the AI theme – a balancing act is required.

You don’t want to be left behind, and you don’t want to get carried away.

What does this mean in practice? Owning some exposure to the theme, being selective, remaining vigilant.

On up days, you feel like you don’t own enough of these stocks. On down days, you feel like you own too much…

Welcome to investing!

Mood music: Tracy Chapman – Fast car

By popular demand, here is the One week / One topic playlist

The information provided should not be considered a recommendation to purchase or sell any particular security.