The Bank for International Settlements said the five largest hyperscalers are on track to spend more than $1 trillion on AI capital expenditure in 2025 and 2026
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The Bank for International Settlements warned in its annual report Sunday that the current surge in AI investment spending could end in a stock market crash and recession, drawing comparisons to previous technology booms that collapsed with severe economic consequences.
The Switzerland-based institution, which serves as a coordinating body for central banks worldwide, said fierce competition among leading AI firms may have pushed investment to excessive levels, leaving the sector exposed if returns disappoint. The five largest hyperscalers are on course to spend more than $1 trillion on AI-related capital expenditure in 2025 and 2026, according to The Wall Street Journal.
"The race to capture market share may have led to overinvestment," BIS General Manager Pablo Hernández de Cos said. "This could leave the sector more vulnerable if AI under delivers, possibly bringing the current investment boom to an abrupt end."
The BIS drew parallels to earlier technology cycles, including canal construction in the 1830s, British railways in the 1840s, electrification in the late 1920s, and the dot-com boom of the late 1990s — all of which ended in investment reversals that triggered economy-wide recessions, according to The Journal.
A major equity market correction could carry larger economic consequences today than past downturns of similar scale, the BIS said, because household equity exposure has grown relative to both total wealth and income in recent decades. A sharp drop in valuations could produce a more severe consumption pullback than previous corrections, it added.
The report also flagged risks embedded in how the AI boom is being financed. Early-stage AI development relied largely on internal funding, but investment plans have since grown to depend on debt and complex funding arrangements, the BIS said. It highlighted so-called circular financing deals that blend equity, debt, and supplier-client contracts — for instance, chipmakers and hyperscalers taking stakes in AI labs that then commit to long-term chip or computing purchases. The terms of such arrangements are often poorly disclosed, the BIS said, with risks of the same asset being pledged multiple times.
If hyperscalers slow their capital spending, many firms across the supply chain could struggle to service their debt, the BIS warned, according to The Journal.
Asked how central banks should respond to the AI investment surge, Pablo Hernández de Cos declined to offer a firm prescription. Any attempt to dictate a specific policy course at this stage would be ill-advised, he indicated, according to CNBC.
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