The current artificial intelligence (AI) investment cycle is unlikely to come to an end because US hyperscalers reduce their spending. Instead, the more probable trigger will be investors questioning the lack of meaningful financial returns from the enormous capital being deployed, according to a report by global brokerage firm Jefferies.
The report argues that the inflection point will arrive when markets begin focusing on what it describes as a significant transfer of wealth from the balance sheets of major US technology companies to semiconductor manufacturers and suppliers in North Asia. Jefferies noted that the combined market capitalisation of South Korea and Taiwan has surged from approximately US$3.2 trillion at the beginning of 2023 to nearly US$9.8 trillion, highlighting the scale at which AI-related capital expenditure is benefiting chipmakers and component suppliers in the region.
According to the brokerage, this trend is already becoming evident in market performance. The four leading US hyperscalers—Microsoft, Alphabet, Amazon and Meta—have collectively gained around 180 per cent since the start of 2023, outperforming the S&P 500 Index by roughly 44 per cent over the same period.
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However, Jefferies pointed out that momentum has weakened in recent months. Since late May, the four companies have collectively declined by 8.7 per cent and have underperformed the broader index by 10.2 per cent from their relative peak reached in early May. The firm's "GREED & fear" investment note described this performance trend as one of the most important indicators for investors to monitor going forward.
The report further observed that the four hyperscalers have collectively raised US$144 billion through bond issuances so far this year, compared with US$83 billion during the whole of 2025. This suggests that an increasing share of AI-related capital expenditure is being financed through debt rather than internal cash flows.
Jefferies warned that if the anticipated returns from AI investments fail to materialise, hyperscalers could face what it termed "massive capital destruction, or malinvestment," raising concerns about the sustainability of current spending levels.
Beyond AI, the brokerage believes geopolitical developments remain an underappreciated risk for global financial markets. The report highlighted ongoing uncertainty surrounding the Iran Memorandum of Understanding (MoU) as well as NATO's expanding involvement in the Ukraine conflict, while maintaining its recommendation that investors retain exposure to energy stocks as a hedge against geopolitical disruptions.
Turning to Australia, Jefferies said the probability of an economic slowdown has increased. The Reserve Bank of Australia (RBA) has lifted its benchmark interest rate to 4.35 per cent in an effort to contain inflation, which stood at 4.0 per cent year-on-year in May. At the same time, residential property prices in Sydney have declined by 3.7 per cent over the past five months, signalling growing pressure in the housing market.
The report also pointed to additional challenges stemming from the federal budget measures scheduled to take effect from July 2027. Under the proposed changes, capital gains will be taxed at marginal rates of up to 47 per cent, while negative gearing benefits will be removed for new investment properties, except for newly constructed homes.
Jefferies expects these policy changes to significantly reduce property transactions and investor borrowing. Despite the anticipated slowdown, investor lending still accounted for 43.4 per cent of all new mortgages issued in New South Wales during the first quarter of 2026.
The brokerage added that Australia's macroeconomic outlook is being further constrained by weak productivity growth and deteriorating housing affordability. Real gross domestic product (GDP) per hour worked has fallen by 5.1 per cent since the first quarter of 2022, while the national median dwelling value has climbed to 8.4 times the median household income. In addition, mortgage repayments now consume approximately 45.9 per cent of household income, underscoring the affordability challenge.
From an investment perspective, Jefferies continues to favour an overweight position in resource companies over banks. According to the report, resource stocks have outperformed banking stocks by 54 per cent since June 2025.
The brokerage also highlighted increasing concentration risk within Asian equity markets, noting that technology hardware companies now account for 49 per cent of the MSCI AC Asia ex-Japan Index. This growing dominance, it said, is making it increasingly difficult for diversified investment portfolios to outperform the benchmark.
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