AI investment cycle may have peaked, Jefferies warns; raises India allocation to 14%

The global artificial intelligence (AI) investment cycle may have peaked or could be entering a mid-cycle correction, with rising financing costs and concerns over the returns on massive capital expenditure likely to weigh on technology investments in the coming year, according to a Jefferies report.

Jefferies in its report said financial markets were increasingly signalling reluctance to fund AI-related investments, raising questions over the sustainability of spending by major US technology companies.

"All of the above suggests the AI capex cycle may have peaked, or at least commenced a mid-cycle correction," the report said.


The report noted that the four major hyperscalers -- Microsoft, Amazon, Alphabet and Meta -- increased their combined capital expenditure by 108 per cent year-on-year to USD 202 billion in the third quarter of 2026.

However, growing concerns over financing and profitability could mean that AI-related capital expenditure in 2027 falls short of current market expectations. Consensus estimates put the four companies' combined capital expenditure at USD 1.04 trillion next year.

Jefferies highlighted that AI-related investment contributed 1.39 percentage points, or 67 per cent, to US real GDP growth of 2.1 per cent in the four quarters to the third quarter of 2026.

It also pointed to rising borrowing costs for technology companies, with bond yield spreads of major hyperscalers widening and credit default swap spreads of Oracle and CoreWeave increasing sharply.

The report said a credit-driven slowdown in AI spending could negatively affect US economic growth and trigger a reversal in Federal Reserve policy expectations from monetary tightening towards easing.

Meanwhile, Jefferies said investors should explore opportunities beyond the AI supply chain, particularly in healthcare and biotechnology, where AI applications in drug development could offer significant potential.

On regional asset allocation, Jefferies raised India's weight in its Asia-Pacific ex-Japan relative-return portfolio by two percentage points to 14 per cent, maintaining its Overweight stance. The allocation stood at 12 per cent earlier.

The report also reduced allocations to South Korea and Taiwan by one percentage point each, maintaining Underweight positions in both markets.

The revised allocation reflects Jefferies' continued preference for Indian equities within its Asia-Pacific ex-Japan portfolio, even as global investors reassess technology-driven investment themes.