Jefferies warns AI investment cycle may have peaked

A potential cooling of AI spending

The global investment cycle for artificial intelligence may have reached its peak or could be entering a mid-cycle correction. According to a report by Jefferies, several factors are beginning to weigh on the massive amount of money being poured into technology investments. This shift comes as the market starts to question the long-term sustainability of the spending habits seen in major US technology companies.

One primary driver for this potential slowdown is the rising cost of financing. As borrowing becomes more expensive, the appetite for high-risk, high-reward technology projects may diminish. The report notes that financial markets are increasingly showing a reluctance to fund new AI-related ventures, which could change the pace of development in the coming year.

Furthermore, there are growing concerns regarding the actual returns on these massive capital expenditures. While the initial excitement around AI has driven significant spending, investors are now looking for clear evidence of profitability. If these returns do not materialize quickly, the cycle of investment may face a significant correction as the market adjusts to reality.

Economic signals and market data

The report highlights specific financial indicators that suggest a shift in the tech landscape. For instance, bond yield spreads for major hyperscalers—large-scale cloud service providers—have been widening. Additionally, the credit default swap spreads for companies like Oracle and CoreWeave have increased sharply, signaling higher perceived risk in the sector.

These trends could indicate a credit-driven slowdown in how companies fund their AI ambitions. If the spending on AI infrastructure slows down, it could have a ripple effect on broader economic growth. Specifically, a significant reduction in tech spending might trigger a reversal in Federal Reserve policy expectations, moving from monetary tightening toward easing.

To put the scale of current spending in perspective, consensus estimates currently place the combined capital expenditure of four major companies at USD 1.04 trillion for next year. While this is a massive figure, the Jefferies report suggests that these numbers might fall short of market expectations by 2027. The data suggests that the era of easy, unlimited capital for AI might be reaching its limits.

Impact on GDP and growth

The role of AI in the broader economy has already been significant. Jefferies pointed out that AI-related investment contributed 1.39 percentage points to the US real GDP growth. This contribution was calculated over the four quarters leading up to the third quarter of 2026, showing how deeply integrated AI spending has become in the national economy.

However, the report suggests that the current trajectory may not be sustainable without a clearer path to profit. If the investment cycle peaks now, the contribution to GDP growth could stabilize or fluctuate as companies move from building infrastructure to finding usable products. The transition from heavy spending to operational efficiency is a key theme in the current analysis.

This shift affects not just the technology giants but also the broader financial markets. As investors become more cautious about the

Shifting regional and sector focus

As the investment cycle for AI infrastructure potentially cools, Jefferies suggests that investors look toward different sectors for growth. Specifically, the report highlights opportunities in healthcare and biotechnology. In these fields, AI applications for drug development are expected to offer significant potential, providing a different path for capital than the current hardware-heavy supply chain.

This move toward biotechnology reflects a broader strategy of diversifying away from pure technology spending. By focusing on practical applications in medicine, investors may find more stable returns. This shift allows for a balanced approach that moves beyond the primary AI supply chain while still benefiting from the underlying technological advancements.

Rebalancing the Asia-Pacific portfolio

The firm is also making notable changes to its regional asset allocations within its Asia-Pacific ex-Japan relative-return portfolio. Jefferies raised the weight of India to 14 percent, which is an increase of two percentage points from its previous standing. This move maintains an Overweight stance on Indian equities, signaling a continued preference for the market even as global investors reassess current technology themes.

In contrast, the report indicates a reduction in allocations for both South Korea and Taiwan. The firm lowered the weight in each of these markets by one percentage point, while maintaining an Underweight position in both. These adjustments show a strategic reallocation of capital toward India as the firm navigates the evolving landscape of global investment and technology-driven trends.