Iran conflict latest: Trump pauses Iran energy plant strikes by 10 days
A recent Bloomberg article, “Microsoft (NASDAQ:MSFT), Meta (NASDAQ:META) Add to $700 Billion Surge in Data Center Leases,” reminds us that the massive growth in data centers will continue for the foreseeable future. However, it also warns that the massive investments in AI infrastructure by the largest AI companies exceed what their financial statements suggest.
The article notes that Microsoft and Meta each committed nearly $50 billion in additional data center leases in their most recent quarters. As the Bloomberg graph below shows, data center lease commitments from the largest cloud computing companies are above $700 billion. Oracle (NYSE:ORCL) leads the group with $261 billion, much of which is tied to its contract with OpenAI.
Data center leases do not appear on balance sheets because accounting rules require recognition only when payments begin. In other words, investors may not be fully aware of the true amount of capital commitments these companies have made but have not yet paid for the AI infrastructure buildout.
Could the massive AI-related spending, both on- and off-balance-sheet, become a dangerous overcommitment? The answer lies in the amount and timing of AI-related revenue. While the question is unanswerable today, it’s worth appreciating that history is littered with examples of industries that spent massively on infrastructure in anticipation of demand that arrived more slowly than expected. The most recent example is the fiber-optic networks of the late 1990s.
The AI revolution may well justify every dollar of investment committed and maybe more, but investors would be wise to assess whether the revenue models will mature quickly enough to service the obligations being incurred today.
The Week Ahead
The Fed will meet this week to discuss monetary policy. As we share below, the market is pricing in a minisclue 0.8% chance of a rate cut. While the likely “no change to policy” statement is well anticipated, investors will keenly focus on how the Fed is thinking about inflation and economic growth in light of the conflict in Iran and the surge in oil prices.
We think it’s probable that the Fed has become even more entrenched with the idea of leaving rates alone, given the risk that higher oil prices could pressure inflation higher. However, it will be interesting to see whether Fed members are equally concerned about the prospect that higher oil prices reduce consumption of other goods, resulting not only in an offset of inflationary pressures but also in weaker economic activity.
Also of note, we are interested in how attuned Fed members are to recent problems in the private credit market and how that might impact the financial system and, ultimately, monetary policy.
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