The AI trade remains the Big Story that might continue to frustrate the new Big Short, i.e., the positions of traders who believe AI is a bubble that will soon burst. We don't think so.
AI is the latest evolution in the Digital Revolution, increasing the amount of data that can be processed, analyzed, and stored at ever-faster speeds and at ever-lower cost. So it feeds on itself, creating more demand for IT hardware and software as it is fed more and more data. Buzz Lightyear comes to mind when he declared, "To infinity and beyond."
Will all the capital spending on AI infrastructure ever make any money? It already is, as evidenced by the rapid growth in cloud providers' revenues. Microsoft, Amazon Web Services, and Google Cloud all saw their cloud sales continue to soar in Q3-2025, with combined total revenue of $79 billion, up 26% y/y and an annual run rate of $316 billion. We see AI as an App with multiple applications, driving demand for cloud computing capacity.
Of course, the demand for AI capacity will grow only if the AI App boosts the productivity and profits of the S&P 493, not just the Magnificent-7. That may be starting to happen (chart).
