U.S. stocks continue to reach record highs, fueled largely by optimism surrounding artificial intelligence. However, some analysts are warning that investors may be underestimating risks emerging beneath the surface of the AI-driven rally.

According to analysts at TS Lombard, the debate over whether massive AI spending can generate sufficient returns is far from over. While many investors believe strong earnings and soaring stock prices have settled the issue, concerns remain about how much of the industry's growth is being supported by what analysts call "capex recycling."

What Is Capex Recycling?

The concern centers on the relationship between major cloud providers and AI startups.

Large technology companies such as Microsoft, Alphabet, Amazon, and Oracle Corporation are investing billions into AI infrastructure while simultaneously providing funding to AI firms like OpenAI and Anthropic.

These AI companies then become major customers of the same cloud providers, purchasing computing power and data-center services. This creates a cycle in which spending circulates throughout the AI ecosystem, boosting reported revenues and earnings across multiple companies.

While this supports growth in the short term, analysts warn that the entire ecosystem could become vulnerable if AI capital spending eventually slows.

Two Classic Warning Signs

TS Lombard highlights two factors often associated with major market peaks:

1. Rising IPO Activity

Several high-profile AI-related companies are preparing to enter public markets, including:

• SpaceX
• Anthropic
• OpenAI

Historically, major waves of IPO activity have often occurred near market tops as early investors seek liquidity and profits.

2. Tighter Monetary Policy

Central banks are becoming more concerned about inflation.

Investors increasingly expect:

• The European Central Bank to raise interest rates.
• The Bank of Japan to tighten policy.
• The Federal Reserve to potentially consider future rate hikes if inflation remains elevated.

Higher interest rates generally reduce the value investors place on future growth, making richly valued technology stocks more vulnerable.

Market Snapshot

Despite the warnings:

• The S&P 500 remains up nearly 11% this year.
• The Nasdaq Composite has gained more than 15%.
• AI-related stocks continue to dominate investor attention.
• Gold remains near historic highs around $4,500 per ounce.
• Oil prices remain elevated due to ongoing Middle East tensions.

What Investors Should Watch

The AI investment cycle still has strong momentum, supported by rising demand for chips, servers, data centers, and cloud services. However, analysts caution that current valuations assume years of continued growth and spending.

A slowdown in AI infrastructure investment, a wave of insider selling following upcoming IPOs, or tighter global monetary policy could challenge the market's optimistic assumptions.

Bottom Line

The AI boom continues to drive stock markets higher, but some analysts believe investors may be overlooking risks. While the current rally remains intact, growing IPO activity, elevated valuations, and the possibility of tighter monetary policy are factors that have historically appeared near major market peaks. The key question for investors is whether AI spending can continue growing fast enough to justify today's lofty expectations.