Political scrutiny of data centers could stabilize AI investment

“It is necessary that the investment in AI slow to a more sustainable pace. It is in the interest of the AI trade itself,” stated RSM US chief economist Joseph Brusuelas. He cautioned that market bubbles typically involve misallocation of resources and failures, and a controlled deflation could benefit the long-term health of the AI sector.

Major market indices reflected a sense of relief on Wednesday, with the S&P 500 up 2%, the Dow up approximately 3%, and the Nasdaq Composite ahead 1.5% by noon ET. Companies heavily involved in AI infrastructure, including Meta, Google, Amazon, and Microsoft, saw gains exceeding 4%. Conversely, power companies, key consumers of this infrastructure, experienced declines, with GE Vernova down about 10% and Constellation Energy down 6%.

Economists suggest that the potential limitations on data center expansion could prevent a disruptive market crash. Aditya Bhave, head of U.S. economics research at Bank of America, noted that AI-related capital expenditures have been growing at an annualized rate of 26% since the beginning of last year, indicating over-investment. He believes that “adding a bit of sand in the gears might actually benefit markets and the economy in the medium term.”

This slowdown could also redirect capital into other sectors, potentially stabilizing the economy, according to Brusuelas. However, smaller, AI-focused cloud providers, such as CoreWeave, Nebius, and IREN, are facing challenges, with CoreWeave down about 9%. Gartner predicts that 80% of these neoclouds may cease independent operations by 2030 due to insufficient revenue.

Despite the overall positive market reaction, securing capital remains a priority for AI companies, with hyperscalers, equipment providers, and algorithm developers seeking substantial funding. Political obstacles could hinder this process. Julian Emanuel at Evercore highlighted concerns about rising borrowing costs and the need for structured financing.

The environment for the AI sector remains “challenging,” according to 22V Research. Texas, which hosts 27% of U.S. data center capacity, is facing increased scrutiny, particularly with the election of Gina Hinojosa (D) as the next governor, who is expected to take a stricter stance on data centers compared to her predecessor, Greg Abbott (R).