From hype to hard returns: AI enters a new phase

Three years after the launch of ChatGPT, the narrative around AI is beginning to shift from “what’s possible?” to “what’s profitable?” Investment remains at full throttle, and innovation is driving real‑world gains, but strong stock performance and speculative activity in some corners of the market are sparking anxiety over a potential bubble. As leading firms increasingly tap debt markets for capex, pressure is mounting to carve out clear paths to monetization.

We believe AI (artificial intelligence) remains on track to become the biggest productivity driver for the global economy since electricity. It has the potential to be transformative not just for tech firms, but for nearly every sector—healthcare, finance, manufacturing, education, and beyond—by unlocking new solutions to complex challenges. The leading firms are maintaining aggressive, multibillion‑dollar annual capex programs to build out data centers, purchase advanced graphics processing units (GPUs), and expand cloud capacity. Many have announced or have begun construction of new AI supercomputing hubs to meet surging demand from corporate and consumer AI applications.

Debt demands discipline—and brings risk

Until now, these capex budgets have been largely funded by the operating cash flows of the most profitable companies in history. However, the magnitude and acceleration of AI capex requirements are such that even some of the leading firms are unable to continue funding them solely through internal cash generation. The public bond market may partially fulfill firms’ funding needs, but even that could be too shallow to fund a sustained period of very high capital intensity, meaning other sources of capital will be required—most notably private credit.

As debt capital starts to fund AI investments, this will add to the already‑growing pressure on the leading firms to establish well‑defined strategies for turning innovation into profits. Debt is capital that must be repaid and comes with regular interest payments, restrictive bond covenants, and a new set of stakeholders to appease, meaning the borrower must generate reliable cash flows to service the debt. Lenders are also fundamentally more risk averse than equity investors, so typically they demand a clear path to monetization to reduce credit risk.

Debt funding also increases risk. As firms take on more debt, their fixed obligations increase, and if revenue growth fails to keep pace, they may struggle to service the debt—especially if interest rates rise or business conditions weaken. Debt markets can also be more sensitive to macroeconomic shifts such as rate hikes, credit spreads, and a loss of liquidity. If many AI firms become highly leveraged and sector growth slows, systemic risks could occur—impacting lenders, investors, and the broader market.

Hardware and hyperscalers still lead the way

While the risk of an AI bubble intersecting with a credit bubble cannot be discounted, we remain very positive on the outlook for the AI sector. The AI chip market still has a lot of growing to do: AMD estimates that the AI data center chip total addressable market will rise from around $200 billion in 2025 to $1 trillion in 2030.¹ The leading chipmakers provide the essential hardware powering both training and inference for AI models and are therefore essential for the AI infrastructure boom. They have also benefited from technological expertise, scale, and established supply chains, creating considerable barriers to entry.

The AI hyperscalers—the large tech firms that operate cloud platforms and data centers—are being driven by sustained demand for cloud computing, AI infrastructure, and digital transformation as AI is adopted across industries. These firms are likely to remain the key drivers of innovation, infrastructure buildout, and broader adoption of AI. That said, these hyperscaler companies are also seeing the first rise in competitive intensity to their core businesses in decades, as new-age companies like OpenAI try to encroach on their core business. This rising competitive intensity will likely accelerate the AI capex buildout.

While the AI sector’s expanding capex and reliance on debt will introduce new risks, we believe the long‑term growth prospects remain compelling—especially for the hardware suppliers and hyperscalers at the heart of the ecosystem. For investors, this means focusing not only on visionary technology, but also on execution, financial resilience, and clear paths to monetization as AI enters its next chapter.

Key takeaway
AI is poised to be the biggest productivity driver since electricity, but soaring capex and the growing use of debt finance are fueling demands for clear monetization strategies.

 

 

Appendix

Financial Terms: Investors in the U.S. and Canada, for a glossary of financial terms, please go to troweprice.com/glossary.

Investment Risks:

Active investing may have higher costs than passive investing and may underperform the broad market or passive peers with similar objectives. Each person’s investing situation and circumstances differ. Investors should take all considerations into account before investing.

International investments can be riskier than U.S. investments due to the adverse effects of currency exchange rates, differences in market structure and liquidity, as well as specific country, regional, and economic developments. The risks of international investing are heightened for investments in emerging market and frontier market countries. Emerging and frontier market countries tend to have economic structures that are less diverse and mature, and political systems that are less stable, than those of developed market countries.

Commodities are subject to increased risks such as higher price volatility, geopolitical and other risks. Commodity prices can be subject to extreme volatility and significant price swings.

Inflation-Linked Bonds (Treasury Inflation Protected Securities in the U.S.): In periods of no or low inflation, other types of bonds, such as US Treasury Bonds, may perform better than Treasury Inflation Protected Securities (TIPS).

Investing in technology stocks entails specific risks, including the potential for wide variations in performance and usually wide price swings, up and down. Technology companies can be affected by, among other things, intense competition, government regulation, earnings disappointments, dependency on patent protection and rapid obsolescence of products and services due to technological innovations or changing consumer preferences.

Because of the cyclical nature of natural resource companies, their stock prices and rates of earnings growth may follow an irregular path.

Financial services companies may be hurt when interest rates rise sharply and may be vulnerable to rapidly rising inflation. Health sciences firms are often dependent on government funding and regulation and are vulnerable to product liability lawsuits and competition from low-cost generic product.

The value approach to investing carries the risk that the market will not recognize a security’s intrinsic value for a long time or that a stock judged to be undervalued may actually be appropriately priced. Growth stocks are subject to the volatility inherent in common stock investing, and their share price may fluctuate more than that of a income-oriented stocks.

Small‑cap stocks have generally been more volatile in price than the large‑cap stocks. Investing in private companies involves greater risk than investing in stocks of established publicly traded companies. Risks include potential loss of capital, illiquidity, less available information and difficulty in valuating private companies. They are not suitable, nor available, for all investors.

All investments involve risk, including possible loss of principal. Diversification cannot assure a profit or protect against loss in a declining market. Index performance is for illustrative purposes only and is not indicative of any specific investment. Investors cannot invest directly in an index.

Fixed‑income securities are subject to credit risk, liquidity risk, call risk, and interest‑rate risk. As interest rates rise, bond prices generally fall. Investments in high‑yield bonds involve greater risk of price volatility, illiquidity, and default than higher‑rated debt securities. Investments in bank loans may at times become difficult to value and highly illiquid; they are subject to credit risk such as nonpayment of principal or interest, and risks of bankruptcy and insolvency. Some or all alternative investments such as private credit, may not be suitable for certain investors. Alternative investments are typically speculative and involve a substantial degree of risk. In addition, the fees and expenses charged may be higher than the fees and expenses of other investment alternatives, which will reduce profits. As interest rates rise, bond prices generally fall. Investments in high yield bonds involve greater risk of price volatility, illiquidity, and default than higher rated debt securities.

T. Rowe Price cautions that economic estimates and forward‑looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time. Actual outcomes could differ materially from those anticipated in estimates and forward‑looking statements, and future results could differ materially from any historical performance. The information presented herein is shown for illustrative, informational purposes only. Any historical data used as a basis for this analysis are based on information gathered by T. Rowe Price and from third‑party sources and have not been independently verified. Forward‑looking statements speak only as of the date they are made, and T. Rowe Price assumes no duty to and does not undertake to update forward‑looking statements.