AI investment risks triggering recession

Investors are increasingly worried that the massive spending by artificial intelligence companies is an underappreciated risk that could trigger a recession if it stops suddenly.

Surging spending on AI infrastructure

Hyperscalers like Alphabet and Microsoft are estimated to spend $750 billion on capital expenditure in the coming years, a figure that has risen from $450 billion just a year ago.

The spending share of the economy is also rising. AI capex will grow from 1.8 per cent of US GDP in 2026 to 2.5 per cent in 2027, with projections pushing it to 2.8 per cent by 2028. This rapid increase puts a significant portion of national wealth at stake.

While the focus often remains on the technology itself, the financial underpinnings of this growth are drawing scrutiny. According to Sebastian Mullins, head of multi-asset and fixed income at Schroders, the scale of this investment is unprecedented.

“A risk is that not being priced in but is being talked about ad nauseum is the AI build-out,” Mullins said during an appearance at the Australian Wealth Management Summit. “The amount of money being spent on capex is leading the economy forward especially in the US.”

The danger of a sudden halt

Mullins warned that the economy has become dangerously dependent on this steady stream of funds. He suggested that if the spending stops, the consequences would ripple through the entire market structure.

“If they decide to stop spending then what’s going to happen? The chip manufacturers might crash, if they stop spending because there’s no actual earnings then the hyperscalers might crash,” Mullins explained. He noted that this spending is a massive part of the economy, and a sudden halt could cause a downturn.

The mechanism for this downturn would likely involve the wealth effect. With Americans and Australians holding a greater proportion of equities than ever before, a market crash would directly impact household wealth. When people feel poorer, they tend to stop spending, which triggers a broader economic contraction.

“So many Americans and Australians have their wealth tied up in equities that if the equity market falls then that could cause a recession because people stop spending because the wealth effect goes into reverse,” Mullins said.

It is a difficult dynamic to model because the spending has been so consistent. Investors are used to seeing these companies pour money into datacentres and hardware, but there is no guarantee this momentum will last forever. The timing of the spending is just as important as the amount.

Schroders previously flagged a risk scenario where an AI-driven equity bubble bursts in the third quarter. That outlook warned of a pullback in capital spending that could lead to a broader market sell-off. Joseph Briggs, co-leading Goldman Sachs’ Global Economics team, agreed that the height of AI spending is becoming a macro concern. Globalization Holds Steady Despite Growing Geopolitical Tensions, yet the specific focus on these massive outlays remains distinct. Meanwhile, the financial services sector is seeing leadership changes. DASH appoints new chief executive to handle this complex environment.