Making sense of the forces driving global markets

By Jamie McGeever, Reuters Open Interest Markets Columnist 

Wall Street was mixed on Monday, with bumper corporate dealmaking activity and another mega AI-related tie-up offset by murky signals around the path for U.S. growth and interest rates, while the dollar crept up to a fresh three-month high.  

In my column today, I look at whether Big Tech's big spend on AI will generate the big returns investors are clearly hoping for. No one has a crystal ball, of course, but the huge sums being spent mean the bar for decent returns is very high too. 

I’d love to hear from you, so please reach out to me with comments at jamie.mcgeever@thomsonreuters.com. You can also follow me at @ReutersJamie and @reutersjamie.bsky.social. 

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* Tech debt

 In September, Oracle tapped the bond market for $18 billion, last week Meta announced its largest ever bond sale of up to $30 billion, and on Monday Google's owner Alphabet said it is raising debt finance. Media reports put the multi-tranche issue at around $22 billion. 

Investors are lining up to lend to these tech giants, of course, but the borrowing does raise questions around how much their collective AI capex splurge is eating into cash flows. If Big Tech borrows big in the months ahead, could that affect demand for U.S. Treasury debt?. 

* Do you want to make a deal?

Kimberly-Clark is buying Band-Aid maker Kenvue in a deal worth nearly $50 billion, something of a surprise move given the premium paid and some of the controversies and difficulties facing Kenvue.

Dealmaking appetite is strong - Wall Street is booming, the Fed is cutting rates, and financial conditions are the loosest in years. Deals targeting US-based companies totaled $1.7 trillion, according to LSEG, up 36% year-on-year and second highest since LSEG records began in 1970. Justified, or is irrational exuberance creeping in? 

* Fed fissures

Uncertainty around the Fed's next step is rising, and understandably so. The U.S. government shutdown is about to extend to a record-matching 35 days on Tuesday, and online betting market Polymarket is predicting it won't end until December 2.

No data means very little visibility. Add to that the growing differences between FOMC hawks and doves, and little wonder the probability of a December cut has slumped to 65% from 90% last week. Few would bet against it being closer to a 50-50 call soon.

The reaction of most "Magnificent Seven" tech giants' shares to their latest earnings suggests the artificial intelligence boom is far from over. Yet doubts about the future returns from these firms' astronomical AI expenditures are gnawing deeper.

The third quarter earnings season has seen these tech behemoths continue to rake in huge profits and offer sunny guidance. Some investors may baulk at the Mag 7's lofty valuations, but today's tech leaders – unlike the superstar firms of the 1990s dotcom bubble – appear to have sustainable business models. Federal Reserve Chair Jerome Powell reiterated as much last week, saying that their AI investments are a major source of U.S. economic growth.

Just four "hyperscalers" alone - Microsoft, Amazon, Meta and Alphabet - are expected to spend a combined $350 billion this year, and Goldman Sachs estimates global AI-related infrastructure spending could reach $4 trillion by 2030.

The more these firms splurge on data centers, cloud computing capabilities, and the gamut of AI technologies, the loftier investors' expectations will get. At some point, they will be impossible to meet. 

The financial benefits and cost savings for society resulting from that are one thing; which companies actually profit is another. It is important, therefore, to distinguish between "value creation" and "value capture".  

"The value creation is certainly there," says Daniel Keum, associate professor of management at Columbia Business School. "But will that value flow back to the companies that are making these AI investments right now? For me, the clear answer is no."