EYE ON THE MARKET | OUTLOOK 2026 Smothering Heights The market cap of four hyperscalers and the semiconductor ecosystem companies they rely on has grown from $3 trillion to $18 trillion in just a few years, and a broader group of 42 AI related companies has generated 65%-75% of S&P 500 earnings, profits and capital spending since ChatGPT's launch in November 2022. Is this moat really indestructible? In this year's Outlook we focus on four medium term risks: US power generation constraints, China scaling the ...

I THINK EVERYBODY'S TRYING TO WORK THROUGH TO MAKE SURE THAT THERE IS NOTHING UNTOWARD GOING ON. CAROLINE: BLOOMBERG DIDN'T FIND EVIDENCE OF ANY MEGASPEED NVIDIA CHIPS BEING DIVERTED TO CHINA. THERE ARE ALL THESE INCONSISTENCIES IN MEGASPEED SOUTHEAST ASIA DEMAND AND CHIP AND ENTRY WHEREVER THEY END UP. WHAT'S INTERESTING IS THIS IS THE MOMENT WHERE MAYBE ACTUALLY NVIDIA WILL GET MORE ACCESS TO CHINA. H-200'S HAVE IN THEORY, ACCORDING TO TRUTH SOCIAL POST, ARE GOING BACK IN CHINA. THE QUESTION IS WHETHER CH ...

Group 1 - Meta Platforms, Inc. is in discussions with Alphabet regarding the use of Alphabet's chips, which may replace high-priced semiconductors from NVIDIA [1] - The stock of Meta increased nearly 4% as investors anticipate that the new chips from Google could improve Meta's gross margins [1] - The shift away from NVIDIA's chips is seen as a potential benefit for Meta, aligning with the trend of companies seeking cost-effective semiconductor solutions [1] Group 2 - Meta develops a range of social media and communication products, including Facebook, Instagram, Messenger, Threads, and WhatsApp, as well as virtual and augmented reality hardware and software [2]

Core Viewpoint - NVIDIA is positioned as a leader in the AI revolution, with a strong demand for its chips that significantly outstrips supply, indicating a robust market presence and potential for growth [3][5][11]. Company Analysis - NVIDIA's current chip demand is at a ratio of 12 to 1, highlighting the company's inability to meet the overwhelming demand for its products [3][5]. - The company is recognized for its transparency and proactive communication regarding its market position and challenges [2][3]. - NVIDIA is seen as a dominant player in the AI sector, with comparisons made to historical tech leaders, suggesting that it is well ahead of competitors like Huawei [5][11]. Industry Context - The anticipated spending on AI is projected to be between $3 trillion and $4 trillion, indicating a significant growth opportunity for companies involved in AI technologies [6][9]. - The current market environment is likened to a pivotal moment in tech history, suggesting that the AI sector is in a growth phase rather than a bubble [6][11]. - The competitive landscape includes major players like Google, Microsoft, and Oracle, with the potential for multiple winners in the enterprise AI race [10][11]. Market Sentiment - There is a bullish sentiment surrounding NVIDIA, with analysts suggesting that current stock prices represent a significant buying opportunity [11][12]. - The company's leadership under Jensen Huang is emphasized as a critical factor in its ongoing success and influence in the AI market [12][13].

Core Insights - Columbia Threadneedle Investments reported strong market performance in Q3 2025, with a composite return of 12.06%, slightly below the S&P Global 1200 Information Technology Index's return of 12.82% [1] - The fund's positive stock selection contributed to its relative performance during the quarter [1] Company Highlights - NVIDIA Corporation (NASDAQ: NVDA) was highlighted as a core holding, achieving a one-month return of 9.14% and a 52-week gain of 48.83%, closing at $202.49 per share with a market capitalization of $4.93 trillion on October 31, 2025 [2][4] - NVIDIA's quarterly revenue doubled year-over-year, driven by high demand for data-center products and the adoption of its chips in generative AI applications [3] - The company is positioned at the center of the global AI computing cycle, supported by its hardware leadership and strategic partnerships, including a $100 billion investment in OpenAI [3] Market Position - NVIDIA ranked 5th among the 30 most popular stocks among hedge funds, with 235 hedge fund portfolios holding its stock at the end of Q2 2025, an increase from 212 in the previous quarter [4] - In Q2 2026, NVIDIA reported revenues of $46.7 billion, surpassing expectations, indicating strong market confidence [4]

Core Insights - The Bank of England has warned about 'stretched valuations' in the AI stock market, indicating a potential for a sharp correction that should concern the leasing sector [1][2] Group 1: Market Dynamics - The interconnectedness of major players in the AI ecosystem, such as NVIDIA, OpenAI, and Microsoft, creates systemic risks, as their partnerships tightly bind capital, infrastructure, and R&D [3] - Seven tech companies—Apple, Amazon, Meta, NVIDIA, Tesla, Microsoft, and Alphabet—account for approximately 30% or more of the S&P 500 by market capitalization, driving most of the index's growth [4] Group 2: Impact on Leasing Sector - A shock to any major player in the AI ecosystem could have cascading effects, impacting leasing firms that utilize AI directly or indirectly [5] - The current AI sector is characterized by high valuations that are not supported by sustainable cash flows, with NVIDIA being a notable exception due to its record profits [6] Group 3: Speculative Nature of Investments - Investor enthusiasm and speculative beliefs in future transformations are driving prices, which may indicate a classic asset bubble from a governance perspective [7]

Group 1 - NVIDIA Corporation (NASDAQ:NVDA) is recognized as one of the top 13 Fortune 500 stocks to invest in currently [1] - xAI, an AI startup founded by Elon Musk, is negotiating a $20 billion lease-to-own deal for NVIDIA's chips to power its Colossus 2 data center in Memphis [2] - The deal is structured through a special purpose vehicle (SPV) created by Valor Equity Partners, combining $7.5 billion in equity and $12.5 billion in debt to acquire the chips from NVIDIA [3] Group 2 - NVIDIA will contribute $2 billion in equity to the SPV, thereby transferring most of the financial risk to Valor while aiding xAI's AI computing goals [4] - NVIDIA is a leading provider of graphics, compute, and networking solutions, offering services in data center accelerated computing, AI software, networking, automotive platforms, robotics, and DGX cloud computing [4]

Group 1 - Amazon.com, Inc. (NASDAQ:AMZN) is experiencing a potential bottoming phase, as indicated by its stock performance rising despite a recent Web Services outage [1] - The stock had previously faced a decline due to concerns about Amazon Web Services lagging behind Microsoft's Azure, highlighted during a conference call [1] - Analyst sentiment was negatively impacted when Amazon CEO Andy Jassy did not reassure investors about the company's spending and returns on technology investments [1] Group 2 - There is a belief that certain AI stocks may offer greater upside potential and carry less downside risk compared to Amazon [2] - A report is available that identifies an undervalued AI stock that could benefit from current economic trends [2]

Core Insights - NVIDIA has initiated a significant partnership with OpenAI, committing up to $100 billion, which will lead to OpenAI purchasing 10 gigawatts of NVIDIA chips [2][7] - OpenAI's recent deals with other companies, including AMD and Oracle, are projected to result in over $1.5 trillion in new spending, raising concerns about the sustainability of such investments and the potential for an AI bubble [2][8] - The interconnected nature of these deals has led to discussions about OpenAI becoming "too big to fail," with its performance impacting a wide range of AI-related stocks [8][11] Major AI Deals - NVIDIA's $100 billion investment in OpenAI is a pivotal moment in the AI market, influencing various sectors from memory stocks to semiconductor equipment suppliers [3] - OpenAI's agreements with AMD and Oracle, alongside its partnership with NVIDIA, are expected to drive substantial revenue growth for these companies, with AMD anticipating $90 to $100 billion from its deal [7][8] - The financial structure of these partnerships includes complex arrangements where NVIDIA invests in build-out costs while receiving equity back, indicating a strategic long-term vision [9] OpenAI's Central Role - OpenAI's success is critical for the broader tech ecosystem, as its revenue growth targets will significantly influence investor sentiment and market trends [8][10] - The recent surge in stock prices for companies like Taiwan Semiconductor and Micron can be attributed to OpenAI's announcements and partnerships, demonstrating the ripple effect of OpenAI's activities on the semiconductor industry [10] - Concerns have been raised about the reliance on OpenAI as a single pillar for industry growth, with potential risks if the company faces challenges [11]

Summary of the Conference Call Industry Overview - The discussion primarily revolves around the **AI industry** and its implications for the **U.S. economy** and **technology sector**. The focus is on the investment landscape, particularly in relation to AI and its value chain. Key Points and Arguments U.S. Economy and Federal Reserve - The U.S. economy is described as **resilient**, supported by high-end consumer spending and strong nonresidential fixed investment [6][12][13] - There is a **bifurcation** in consumer-focused tech companies, with management teams reporting decent consumer health, while enterprise tech shows **tepid growth** in IT budgets due to rapid changes in technology [7][9] - The Federal Reserve is facing trade-offs regarding interest rate cuts amidst rising inflationary pressures and resilient growth [11][14] AI Investment Landscape - There is significant **enthusiasm** for AI-related investments, leading to a **dichotomy** between perceived AI winners and losers across sectors [17][21] - The **tech momentum factor** has reached levels not seen since 2002, indicating a potential risk in the market [18] - The **AI value chain** is broken down into four categories: application providers, AI models, data center operators, and semiconductor capital equipment suppliers [22][21] Data Center Infrastructure - The largest spenders in data centers are **hyperscale cloud service providers** (Amazon, Google, Microsoft), expected to spend around **$350 billion** in CapEx this year [39] - The **Neo Clouds** are emerging as a new category, reselling access to GPUs, but are heavily reliant on debt financing [40][44] - The **data center spending** is transitioning from cash flow funded to more debt-fueled investments, raising concerns about sustainability [41][42] AI Model Providers - The main players in AI model development include **OpenAI, Google, Meta, Anthropic**, and **XAI** [48] - These companies are projected to spend around **$150 billion** on training AI models next year, primarily funded through existing profitable businesses or ongoing debt issuance [50][51] Application Layer - The application layer is dominated by AI chatbots like **ChatGPT**, which has scaled to **800 million users** and a revenue run rate exceeding **$10 billion** [60][61] - Revenue generation is currently driven by paid subscriptions, with expectations for future monetization through advertising [61][62] - There is a significant mismatch between the scale of investment in infrastructure and the current revenue generated from AI applications, estimated at **$15-20 billion** [63][64] Investment Opportunities and Risks - The investment strategy focuses on **semiconductors** and **hyperscalers**, with caution advised regarding **Neo Cloud providers** due to high customer concentration and cash burn [46][47] - Concerns about overinvestment and potential market corrections are highlighted, with a warning that many companies may not achieve sustainable profits [71][72] - The discussion suggests that AI may be more of a **sustaining innovation** rather than a disruptive one, indicating potential opportunities in traditional sectors like **enterprise software** and **IT services** [69][70] Global Perspective - China's AI ecosystem is rapidly developing, with companies like **Tencent, Baidu, and Alibaba** benefiting from AI advancements, despite challenges in accessing cutting-edge technology [77][78] Other Important Insights - The call emphasizes the need for a cautious approach to investing in AI, recognizing the potential for both significant opportunities and risks in the current market environment [74][75]