AI trade cracks as Microsoft's $30B capex bill spooks investors

Sarah Kunst of Cleo Capital says the AI hyperscaler concentration trade is cracking as capital rotates to suppliers.

The S&P 500 fell 1.8% on the week and the Nasdaq 100 dropped 3.27% as investors questioned whether the AI hyperscaler trade had peaked.

"People are wondering if putting all of their eggs into the AI, a sort of high growth hyperscaler basket, was maybe not the best idea over the past couple of years," Sarah Kunst, managing director at Cleo Capital, said on CNBC Friday.

Microsoft is down 22% year to date and 25.6% over the past year despite third-quarter earnings per share rising 30%. The company spent $30.88 billion on capex in the third quarter alone, up 84% from a year earlier. Apple fell 6.2% on the week and 9.4% over the past month. Alphabet has guided 2026 capital spending of $175 billion to $185 billion.

The rotation is flowing to the suppliers. Micron reported revenue of $41.456 billion, beating consensus by 17.6%, with GAAP gross margins expanding from 37.7% to 84.6%. The stock is up 270% year to date. Taiwan Semiconductor posted May revenue growth of 30.1% and guided full-year 2026 growth above 30%.

Equal-weighted names, health care, industrials and financials are catching bids while the hyperscalers bleed, Kunst said, describing the rotation as "healthy." The divergence between hyperscaler capex and stock performance is widening. Microsoft's capital spending rose 84% year over year to $30.88 billion in the third quarter, yet the stock has shed more than a fifth of its value this year. Investors are now asking how that math compounds as Alphabet prepares to spend as much as $185 billion in 2026.

Micron's results illustrate the shift. Chief Executive Officer Sanjay Mehrotra called the performance evidence of "the strategic value of memory in the AI era." The company guided fourth-quarter revenue to $50 billion, plus or minus $1 billion, with gross margins around 86%. Taiwan Semiconductor's May revenue grew 30.1% year over year, and Chief Executive Officer C.C. Wei has guided full-year 2026 growth above 30%. SK Hynix, another memory supplier flagged by Kunst, is also positioned to benefit as hyperscalers continue spending on infrastructure even as their stock prices lag.

The question for investors is whether the rotation has further to run. The Nasdaq 100 is sitting on a roughly 1.9% monthly loss, while sectors that had been overlooked during the AI rally are drawing inflows. If hyperscaler earnings in coming quarters fail to justify the capex trajectory, the rotation could accelerate.

This article is for informational purposes only and does not constitute investment advice.