An Odyssey Through Market History

Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Head of Public Policy Research at Morgan Stanley.

Today, I'll be talking about why we still expect robust AI capital spending in spite of some rising political pushback.

It's Thursday, July 23rd at 10am in New York.

It should be no surprise to our listeners that data center pushback, a topic that we've been following for some time, has been growing louder. But in 2026, it's accelerated meaningfully. Data we track suggests that an estimated $156 billion of projects were canceled or delayed in 2025. This year alone, in just the first quarter, we've seen almost that same exact number.

The opposition is coming from several directions.

Communities are raising concerns about rising electricity bills, environmental pressures related to water use, and the local quality-of-life effects of large-scale construction. But it's also coming from lawmakers across the aisle. State legislatures with both Democratic and Republican lawmakers have been advancing this type of policy.

At the same time, we're forecasting a little less than a trillion dollars of AI CapEx this year alone, and we think it's an increasingly important component of the macroeconomic growth outlook.

So how do we square that circle?

First, and most importantly, we think this is primarily a supply-side risk rather than a demand-side one. Said differently, we don't expect the backlash to materially reduce projections for compute demand. Instead, it could widen the gap between that demand and the industry's ability to bring new capacity online through things like permitting delays, grid interconnection constraints, and local opposition.

Despite that more difficult political and infrastructure environment, our internet team, led by Brian Nowak, remains constructive on AI capital spending. Our broader thematic estimate for total AI CapEx, including the neo-cloud providers, stands at approximately $870 billion in 2026, and we actually see risks skewed even higher from here.

So why is spending still increasing as the environment for building data centers becomes more challenging? There are a few reasons.

First, the AI ecosystem remains compute constrained. The urgency to invest has not diminished. In fact, growing social opposition and political uncertainty ahead of the 2028 presidential election may actually be encouraging hyperscalers to begin projects earlier, which our credit strategists outline as a potential scenario—a pull-forward of demand before the political and execution risk grows even louder.

Second, the timelines associated with data center construction have become longer. From groundbreaking to operational launch, projects can now take as long as three years or even more. That gives companies a strong incentive to begin developing future capacity well in advance, even if the political pushback is strong.

And third, the underlying demand signal is not slowing. Global weekly token usage, which our analysts view as an important proxy for compute demand, has increased since early January. It's rising and continues to do so throughout the course of this year.

So, in short, the pushback is real, but it appears to be reshaping the buildout rather than stopping it.

That's why our base case is for a conditional buildout. We think projects are likely to face greater scrutiny, longer delays, and more requirements related to environmental impact and community benefits.

But ultimately, we still think they cross the finish line. That could mean higher costs, longer development timelines, and greater geographic dispersion of projects away from the largest existing data center markets.

It could also accelerate the shift toward on-site and behind-the-meter power generation. Fuel cells, turbines, and energy storage are becoming increasingly important as operators look for ways to reduce their reliance on lengthy grid interconnection processes, and that can benefit companies that are able to bring those solutions to the forefront.

Meanwhile, our U.S. equity strategy team maintains a relative preference for hyperscalers over semiconductors over the next several months. As you heard our CIO and Chief Equity Strategist Mike Wilson explain yesterday, that's because the team sees the hyperscalers as early in discounting the market's renewed focus on CapEx discipline.

Further, they retain compelling AI optionality through strong core businesses, leadership potential at the agentic application layer, and an underappreciated cost-efficiency lever.

Putting it all together, we see the growing pushback against data centers as representing a genuine risk to the pace, cost, and geography of the AI infrastructure buildout.

But again, this isn't just a demand story; it's a supply story. And somewhat paradoxically, the scarcity and uncertainty created by these constraints could actually end up pulling capital spending forward rather than reducing it.

As we've said before, the AI race is increasingly moving beyond the question of who can build the best model. It's becoming a competition over who controls the infrastructure, supply chains, and energy systems required to scale those models.

Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist.

Today on the podcast, I will explain why the recent volatility in markets makes sense.

It's Wednesday, July 22nd at 2 p.m. in New York.

So, let’s get after it.

The broadening trade is back and it’s gaining steam. We established this thesis last week. Importantly, there’s a key reason this broadening trade is likely to continue. One of the more crowded areas of the market—semiconductors—has lost its momentum.

As I’ve also noted before, this is not a call that the AI cycle is over. However, stocks do trade on the rate of change in growth, and expectations often reach a place where they can no longer surprise on the upside.

Earnings revisions tend to get too stretched, and capital starts looking for the next place where fundamentals are improving but positioning is still light. This is no different than what happened to other leadership groups earlier this year in areas like precious metals and energy stocks.

Remember, I first made the call for market broadening in our November outlook. My view is that the economy had moved into a new expansion after the rolling recession ended in April 2025. Markets were starting to catch on before the Iran conflict interrupted that trend. Investors piled back into the AI trade—especially semis—as oil prices jumped and Fed expectations shifted more hawkish.

Back in June, I noted that those earnings revisions were likely nearing their peak. Hyperscale stocks starting to lag was the first indication. Since semis ultimately depend on hyperscaler spending, that divergence usually doesn’t last. It doesn’t mean the buildout is ending. However, the spenders may be moving from blind enthusiasm to a more disciplined phase as a means of addressing the market’s concerns about falling cash flows.

We’ve seen this pattern before. Since ChatGPT launched, this ebbing and flowing between the hyperscaler and semiconductor stocks has happened three times. This is the fourth such adjustment, during which the hyperscaler stocks are likely to outperform the semis. Since a few weeks back, hyperscalers have outperformed semiconductors by almost 30 percent.

Another consequence is that the major averages may trade lower in the near term. When a crowded, large-cap leadership group is unwinding, the index can look choppy even as the market underneath is improving.

That’s the key distinction. The index may struggle, but the broadening can still work. Over the next month, don’t be surprised if the S&P 500 trades as low as 7000 before it makes a move to 8000 by year-end. Use this weakness to add to equity positions.

I continue to like Consumer Discretionary Goods, Transports, and Biotech.

Discretionary Goods remains one of the cleaner expressions of the broadening thesis. Wallet share is shifting from services back toward goods, goods pricing is improving, and earnings revisions are strengthening. Transports continue to show improving revisions as volumes stabilize and pricing gets better. Biotech is one of the more attractive lower-rate beneficiaries, especially if policy expectations are too hawkish, as I think they are.

On that last point, the Fed backdrop matters. The June FOMC meeting told us forward guidance is going to be limited, and the inflation path is going to drive policy. The softer-than-expected inflation data last week should allow the Fed to stay on hold rather than hiking. It may take the bond market a few more data points to fully re-price this view.

Bottom line, the broadening is in gear, but it may not feel comfortable because it’s happening while the crowded momentum trade unwinds, a process that is likely unfinished. That’s usually how rotations in market leadership work.

Like spring, it’s often: in like a lion and out like a lamb.

Thanks for tuning in. I hope you found it informative and useful. Let us know what you think by leaving us a review. And if you find Thoughts on the Market worthwhile, tell a friend or colleague to try it out!