Market Pulse

Global equity markets continued to lean heavily on artificial intelligence as the dominant growth narrative, even as dispersion within technology widened. U.S. equities held near record levels, but leadership narrowed sharply around a small cluster of AI infrastructure, semiconductor, and cloud-adjacent firms. You saw capital rotate out of cyclicals and defensives alike, reinforcing how dependent index performance has become on AI-linked revenues.

Bond markets were less enthusiastic. Long-end yields remained elevated, reflecting concerns that AI-driven capex spending could delay disinflation and keep policy restrictive for longer. Financial conditions tightened at the margin as investors questioned whether current growth assumptions justify stretched valuations. The dollar remained firm, reinforcing pressure on emerging-market equities and tightening global liquidity conditions.

Commodities were relatively calm, but copper and power-related inputs stayed bid, reflecting expectations of continued data-center buildout and grid demand. This matters because input inflation tied to AI infrastructure feeds directly into cost structures and capital intensity.

Across markets, correlations rose again, signaling that diversification benefits are weakening when AI sentiment shifts. You are not just trading earnings anymore. You are trading confidence in an ecosystem.

Deep Dive

The most underappreciated risk in today’s AI rally is the closed-loop capital structure forming inside the sector. Many leading AI companies are not only customers of one another, but also investors. Cloud providers invest in AI startups. Chipmakers fund model developers. AI platforms reinvest profits into adjacent AI services. The result is a circular flow of capital that inflates reported revenue without necessarily expanding end-market demand.

You should think of this as an “AI internal economy.” When Company A invests in Company B, and Company B uses that capital to buy compute, cloud, or chips from Company A, both firms book revenue. On paper, growth accelerates. In reality, the same dollar is being recycled. This structure boosts top-line figures, supports valuations, and reinforces bullish narratives, but it also masks true external demand.

This matters for you because markets are pricing AI growth as if it is broadly distributed across the real economy. In practice, a meaningful share of AI revenue growth is intra-sector. That creates fragility. If capital spending slows at any node in the network, the effect cascades across earnings, margins, and guidance.

Another consequence is margin distortion. Revenue growth looks strong, but free cash flow quality deteriorates as firms reinvest aggressively just to sustain the ecosystem. That raises the risk of sharp repricing once investors shift focus from growth rates to capital efficiency.

Your takeaway is strategic. Treat AI exposure as a systemic factor, not a collection of independent companies. Watch capex guidance more closely than revenue beats. Be cautious of firms whose growth depends primarily on other AI firms rather than diversified end-users. When the pool of internal funding tightens, multiples can compress quickly.

Quick Insights

• AI revenue growth is increasingly driven by inter-company spending rather than external demand, increasing systemic risk within the sector.

• Circular capital flows can inflate top-line numbers while masking weaker free cash flow quality.

• Valuations are more sensitive to capex slowdowns than earnings misses in this structure.

• Correlation risk within AI equities is rising, reducing diversification benefits.