United States (US) Artificial Intelligence (AI) stocks have entered a new phase and the market is
starting to notice. For two years the investment thesis was simple: anything with AI in the narrative
was a buy, capital expenditure (capex) was a signal of commitment rather than a cost, and investors
trusted that the revenue would follow. That consensus is cracking. The question being asked in
earnings calls, analyst notes, and boardrooms this quarter is no longer about technological ambition.
It is about arithmetic.
US HYPERSCALERS
The numbers that have surfaced during the second quarter’s earnings season are stark. The five
largest US hyperscalers will spend roughly $760 billion on AI infrastructure in 2026 while expensing
only $211 billion of it on their income statements. The remaining $549 billion is deferred – spread
across 20-year to 30-year depreciation cycles on data centres and three-to-five-year cycles on GPU
clusters (networked groups of computers). Alphabet reported second quarter earnings with headline
earnings per share (EPS) growth of 294% – strip out a $99 billion paper gain on stakes in Anthropic
and SpaceX and core EPS came in at roughly $2.85 against a $2.88 estimate, with the underlying
business delivering solid but ordinary growth. In the same quarter, Alphabet spent $44.9 billion on
capital projects – more than double a year earlier – while free cash flow swung to negative $5.9
billion. Morgan Stanley has described the current period as a "golden window where everybody looks
good." The window, however, is narrowing.
Investment bank, Bank of America, calculated that hyperscaler capex is already consuming 94% of
operating cash flow after dividends and buybacks. Goldman Sachs estimates depreciation and
amortisation will climb from 7% of revenue in 2022 to 12% by 2027, converting upfront spending into
fixed costs that will compress margins for years. The capex-to-revenue divergence is running at
approximately 46% – already exceeding the 32% divergence recorded during the 2001 telecom
overbuild cycle, a period that ended in a multi-year correction. These comparisons are not cherry-
picked. They are the ones being circulated inside the institutions pricing these stocks.
CHINESE MODELS OUTPLAYING THE US?
Let’s bring China into the discussion. Moonshot AI released Kimi K3 on 16 July, a 2.8 trillion
parameter (connection points) open-source model that, within 48 hours of launch, overwhelmed its
own infrastructure and forced a temporary suspension of new subscriptions. It performs close to
Anthropic's most advanced publicly available model at a fraction of the cost. Alibaba followed days
later with Qwen 3.8. In mid-July, six of the top 10 models on OpenRouter – the developer
marketplace where models compete on usage – came from Chinese companies, and all of the top five
did. Online marketplace, Airbnb, is using Alibaba's Qwen for customer service; fintech company,
Coinbase, halved its AI spending by switching employees to Kimi and Z.ai's GLM models; a San
Francisco company that builds AI work assistants switched from Anthropic to DeepSeek and saved
millions; tech company, Mozilla's CTO, switched to Kimi K3 within days of its launch and the list goes
on…
This matters for the investment case for the US hyperscalers, whose models rest on the assumption
that enterprises will pay premium prices for closed models, and that the proprietary nature of OpenAI
and Anthropic's systems justifies the subscription cost and the switching cost. Chinese open-weight
models, freely downloadable and adaptable without ongoing licensing fees, undermine that pricing
power directly. If a company can get 90% of the capability at 10% of the cost by self-hosting a Chinese
open model, the revenue justification for $760 billion in US AI infrastructure weakens. The AI label
no longer automatically signals a premium product in a market with no alternatives. There are now
alternatives. They are good, and they are free.
INFLATION AND INTEREST RATES PUT A SPOKE IN THE US-AI WHEEL
Against this backdrop, US Federal Reserve (Fed), South African Reserve Bank (SARB), European
Central Bank (ECB) and the Bank of England (BoE) all recently kept rates on hold, while citing
concerns over inflation. The Fed voted nine-to-three this week to hold the federal funds rate at 3.50%
to 3.75%, with three regional presidents dissenting in favour of a hike. Warsh used the post-meeting
statement to reiterate the 2% inflation target as absolute and to avoid any forward guidance on cuts.
The market now prices in between one and two Fed rate hikes before year end.
The bond market has delivered its own verdict. The 30-year US Treasury yield hit 5.236% on 29 July,
its highest level since July 2007. The 10-year moved to 4.7%. These are not technical moves. They are
the bond market pricing in an environment where inflation stays above target, central banks cannot
cut, and fiscal deficits continue to require new issuance that the market must absorb at a price. Higher
long-end yields raise the discount rate applied to every future cash flow in the economy. For AI
companies specifically – where the cash flows being priced in are years or decades away, and where
the depreciation drag from current capex will only begin showing up on income statements over the
next several years – the mathematics of valuation tighten directly and immediately.
THE NEED FOR CAREFUL CALCULATIONS
The AI trade is not over. The technology is real, the demand is real, and the competitive dynamics
between US and Chinese models are arguably accelerating progress rather than stalling it. What is
over is the period where owning anything with AI exposure was sufficient. The next phase of this trade
requires knowing which companies will generate actual returns from what they have spent, and at a
30-year yield above 5%, the cost to investors of being wrong about that is considerably higher than it
was when government bond rates were at zero.
TURNING TO THE MARKETS
THE WEEK’S KEY THEMES:
– US 10-year note reaches 4.69% and the 30-year bond rises to 5.23%, its highest level in 19
years
– Tech rebound sees NASDAQ outpace S&P 500 after a week of headwinds in the markets
– Brent crude on track for monthly gain of 19%
– Dollar sheds 1% for the week
BONDS
In the US, Treasury yields moved higher, with the 10-year Treasury note reaching 4.69%, while the
30-year rose to 5.23%, its highest level in 19 years. Investors continued to digest the Fed’s decision to
keep rates unchanged despite three members favouring a hike. Fed Chair, Kevin Warsh, emphasised
the Fed’s inflation objective but avoided firm guidance, leaving markets to question whether a
September increase has merely been delayed.
In the United Kingdom (UK), the 10-year gilt yield stayed above 5%, near a recent two-month high.
The BoE held the Bank Rate at 3.75% by a six-to-three vote, a tighter split than expected.
Policymakers warned that higher energy prices could lift inflation later this year, while Middle East
tensions and US policy uncertainty also weighed on sentiment.
In Europe, Germany’s 10-year bund yield remained above 3.15% as stronger growth and firmer
inflation supported expectations of further ECB tightening. Eurozone gross domestic product (GDP)
expanded 0.4% in the second quarter, ahead of forecasts, with Spain leading regional growth. Higher
inflation readings in Germany and Spain strengthened the case for another possible rate hike.
South Africa's 10-year government bond yield eased by two basis points to 8.77%, as investors
continued to digest the SARB's surprise decision last week to keep the repo rate unchanged at 7%. The
benchmark yield remains 36 basis points higher over the past month, reflecting concerns over rising
oil prices, global inflation risks and uncertainty surrounding the domestic interest-rate outlook.
EQUITIES
In the US, equity futures moved higher as investors weighed fresh results from leading technology
companies – Amazon gained strongly after second-quarter revenue exceeded expectations, helped by
cloud growth and AI investment demand, while Apple slipped as services revenue disappointed,
although stronger iPhone sales lifted overall revenue above forecasts. Semiconductor names,
including Micron, Sandisk, AMD, Intel and Nvidia, also advanced, following a technology-led rebound
in Thursday’s session, when the NASDAQ outpaced the S&P 500 and Dow.
In the UK, the FTSE 100 closed marginally lower after early strength faded. The BoE left the Bank
Rate at 3.75%, with the vote closer than expected. Results shaped individual moves: pest-control
company, Rentokil, fell on asbestos-related concerns, while the London stock exchange group, LSEG,
tobacco company, BAT, and consumer healthcare company, Haleon, declined. Aerospace company,
Rolls-Royce, defence company, BAE Systems, and banking group, Lloyds Banking, rose after stronger
guidance, earnings or shareholder-return updates.
Across Europe, markets advanced as better GDP data and company updates supported sentiment. The
Euro STOXX 50 and STOXX Europe 600 finished higher after eurozone second-quarter growth beat
expectations. Digital energy management company, Schneider Electric, financial services firms, BBVA
and ING, beauty and personal care company, L’Oréal, and luxury car brand, Ferrari, gained, while
sporting apparel company, Adidas, weakened after higher marketing spend concerned investors.
In South Africa, equities ended firmer. The JSE All Share Index rose 1.30%, while the JSE Top 40
added 1.40%. Recent momentum remained positive, with both indices stronger over one month and
year-on-year. Gains appeared broad-based, supported by demand for large-cap shares.
COMMODITIES
Brent has slipped below $86/barrel but remains on track for a monthly gain above 20%. Energy
markets remain alert to Middle East supply risks as renewed US-Iran conflict reduces hopes of quick
diplomacy. Supply data showed that flows through the Strait of Hormuz improved after earlier
disruption, while Saudi Arabia is discussing a maritime coalition to protect Red Sea shipping. Black
Sea exports are also facing pressure after tanker attacks affected a key Kazakhstan-linked terminal.
Gold is trading near $4,100/ounce after two consecutive sessions of gains. A softer dollar, linked to
suspected Japanese yen intervention, is supporting demand, while the Fed’s rate pause has also
helped. However, expectations of possible tightening have limited upside moves. Middle East tensions
are adding safe-haven support, leaving gold on course for its first monthly gain in five months.
CURRENCIES
The US Dollar Index is hovering near 100, leaving it down more than 1% for the week. Pressure came
from the Fed’s cautious messaging and suspected Japanese intervention to support the yen. The dollar
fell sharply against the yen on Thursday, while US Treasury Secretary, Scott Bessent, described the
yen as “very undervalued”. Although the Fed left rates unchanged, three officials preferred a hike, and
markets still assigned a 63% probability to a September increase.
The euro rose to $1.148/€, its strongest level since 17 June, as better eurozone data strengthened
expectations of another ECB rate increase. Second-quarter eurozone GDP grew 0.4%, ahead of
forecasts, with Spain leading and Germany, France and Italy recording modest gains. Firmer inflation
in Germany and Spain also supported a tighter policy outlook, despite weaker risk appetite linked to
Middle East tensions.
Sterling strengthened to $1.34/£ after the BoE held rates at 3.75% by a six-to-three vote. The closer
split suggested policymakers remain concerned about inflation, particularly as higher energy prices
may still feed through later this year. Middle East developments and US policy uncertainty continue to
shape sentiment.
The South African rand is trading around R16.51/$ after a volatile week. It initially weakened to trade
above R16.70/$ when the SARB unexpectedly kept the repo rate unchanged at 7%, surprising markets
that had expected a hike. A softer dollar has also helped as we head towards the end of the week, but
global uncertainty is keeping rand moves uneven.
*Please note that all information is at the time of writing.
Key indicators:
USD/ZAR: 16.51
EUR/ZAR: 19
GBP/ZAR: 22.19
BRENT CRUDE: $86
GOLD: $4,059
Written by Citadel Advisory Partner and Citadel Global Managing Director, Bianca Botes.
Sources: Alphabet SEC filing Q2 2026, Bank of America, CNBC, CNN Business, Federal Reserve,
Fortune, Goldman Sachs Research, Resbank, Rest of World, Sequoia Capital and TFTC.
