Jefferies Flags Risks to Global AI Spending Cycle, Increases India Allocation to 14%

Global financial services firm Jefferies has released a report pointing to potential risks and a possible peak in the global artificial intelligence (AI) investment cycle. According to the report, the sector may be entering a mid-cycle correction driven by rising financing costs and mounting questions over the returns on massive capital expenditure.

Financial markets are increasingly showing reluctance to fund AI-related investments, which raises concerns regarding the sustainability of current spending trends by major US technology companies. The report highlights that four major hyperscalers—Microsoft, Amazon, Alphabet, and Meta—increased their combined capital expenditure by 108 percent year-on-year to USD 202 billion in the third quarter of 2026.

Despite this massive spending, growing concerns over profitability and financing indicate that AI-related capital expenditure in 2027 could fall short of market expectations. Current consensus estimates place the combined capital expenditure of these four companies at USD 1.04 trillion for next year.

Jefferies noted that AI-related investments contributed 1.39 percentage points, or 67 percent, to the US real GDP growth of 2.1 percent in the four quarters leading up to the third quarter of 2026. However, borrowing costs for technology firms are on the rise, reflected in widening bond yield spreads for major hyperscalers and sharp increases in credit default swap spreads for companies like Oracle and CoreWeave.

The report suggests that a credit-driven slowdown in AI spending could negatively impact US economic growth. This scenario could potentially trigger a shift in Federal Reserve policy expectations away from monetary tightening and toward easing.

Amid these reassessments of technology-driven investment themes, Jefferies has adjusted its regional asset allocations. The firm raised India's weight in its Asia-Pacific ex-Japan relative-return portfolio by two percentage points to 14 percent, maintaining an Overweight stance. The allocation previously stood at 12 percent.

Conversely, Jefferies reduced allocations to South Korea and Taiwan by one percentage point each, while maintaining Underweight positions in both markets. The firm also advised investors to explore opportunities beyond the immediate AI supply chain, pointing to sectors such as healthcare and biotechnology, where AI applications in drug development present significant potential.

"Jefferies' decision to raise India's portfolio allocation to 14 percent highlights the growing structural appeal of Indian equities amid shifting global macroeconomic trends. While global technology markets navigate potential corrections in AI capital expenditure and rising borrowing costs, institutional confidence in the Indian market remains resilient. Investors are increasingly looking at diversified sectoral opportunities, balancing cautious stances on major global tech themes with strategic allocations in emerging growth regions." — Dr. Shishir Gupta, Founder & CEO, StartupLanes