BlackRock Highlights Dual Impact of Potential 2027 AI Spending Slowdown

BlackRock’s dual perspective helps explain why Treasuries can act as a hedge against AI risk. A deceleration in AI spending would harm equities but ease capital competition that has kept yields elevated. The shift from suppliers to adopters suggests leadership may move from chipmakers and infrastructure firms to businesses with measurable productivity gains. BlackRock’s question about traditional hedges and its call for flexibility caution against large directional bets until AI adoption data solidifies. The 2027 Global Outlook next month is the next positioning marker.

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The straightforward aspect of the AI trade, betting on the build-out, is over according to BlackRock, and the more difficult question is whether adoption can cover the expenses.

Summary:

• BlackRock indicates the AI narrative is becoming more subtle, shifting from valuing the build-out to evaluating demand, adoption, and beneficiaries.
• A significant AI spending reduction in 2027, though not guaranteed, could adversely impact markets yet also reduce capital competition and bond yields.
• This dual uncertainty led the firm to a neutral position on US equities and to upgrade US Treasuries last month.
• AI's large funding needs are clashing with government debt and energy security and defense spending, prompting crowding-out concerns.
• The high interest rate regime BlackRock has described for five years is now mostly priced in, leading to a less directional outlook.
• The company's 2027 Global Outlook is scheduled for next month.

BlackRock states that the AI investment narrative is becoming more complex. Focus is shifting from infrastructure development to demand, adoption, and ultimate beneficiaries, as capital competition grows.

In its weekly commentary after the 2027 Outlook Forum, the asset manager said recent market moves during the US midterm elections demonstrated this shift. US stocks climbed the day after Democrats gained Congress, fell sharply on Thursday, and stabilized on Friday. During the first phase of AI transformation, BlackRock said the opportunity was in pricing the belief that the build-out must occur. Now investors are balancing the scale and pace of that build-out with how rapidly AI is adopted and spreads across various tasks.

BlackRock characterized the risks as symmetrical. A notable slowdown in AI spending in 2027, which it termed unlikely, could have major negative effects on markets. However, it might also relieve capital competition and reduce bond yields, and its economic impact could moderate some policies. This uncertainty drove the company's shift to neutral for US stocks and its upgrade of US Treasuries last month.

Forum attendees discussed the eventual amount of AI capacity to be built, whether adoption will validate the investment scale, and when opportunities may transfer from providers to adopting firms. They also explored scenarios where spending declines before productivity improvements emerge. Another topic was who gains and who is impacted: technology suppliers, AI-adopting firms, or their customers.

Capital competition was a key theme. AI's massive funding requirements are conflicting with government debt and expenditures on energy security and defense, leading to questions about displacing other borrowers. As credit markets become more discerning, participants considered whether increased equity offerings could assist hyperscalers in managing leverage and maintaining their ability to borrow.

More generally, BlackRock said the supply-led environment of structurally higher interest rates, which it has noted for five years, is now mostly incorporated after four years of an AI-driven bull market. This results in a less directional outlook. Conversations included evolving global capital flows, dynamics between stocks, bonds, and currencies, prospects in Europe, China, and emerging markets, and the dependability of conventional portfolio hedges. The company will present its views in its 2027 Global Outlook next month.