Morgan Stanley frames AI-related capital expenditure as one of the largest investment waves ever recorded. This is not just a sector trend but a primary economic driver, projected to be larger than the shale boom of the 2010s and the telecommunications spending of the late 1990s.

AI challenges traditional monetary policy logic. Historically, lower interest rates spur capital investment that creates jobs. However, if lower rates now incentivize investment in job-reducing AI, the Fed's primary tool for boosting employment may become less effective or even have ambiguous effects, a new dynamic policymakers must understand.

Massive AI and cloud infrastructure spending by tech giants is flooding the market with new debt. For the first time since the 2008 crisis, this oversupply, not macroeconomic fears, is becoming a primary driver of market volatility and repricing risk for existing corporate bonds.

The Federal Reserve is easing monetary policy at a time when corporate earnings are already growing strongly. This rare combination has only occurred once in the last 40 years, in 1998, which was followed by two more years of a powerful bull market run.

A condition called "fiscal dominance," where massive government debt exists, prevents the central bank from raising interest rates to cool speculation. This forces a flood of cheap money into the market, which seeks high returns in narrative-driven assets like AI because safer options can't keep pace with inflation.

The current AI spending frenzy uniquely merges elements from all major historical bubbles—real estate (data centers), technology, loose credit, and a government backstop—making a soft landing improbable. This convergence of risk factors is unprecedented.

Despite tight spreads signaling caution, the current market is not yet cracking. Parallels to 1997-98 and 2005—periods with similar capex, M&A, and interest rates—suggest a stimulative backdrop and a major tech investment cycle (AI) will fuel more corporate aggression before the cycle ultimately ends.

The long-term health of U.S. fiscal policy appears heavily dependent on a future surge in corporate capital expenditures. This spending is expected to fuel a growth burst specifically in the manufacturing and AI sectors, driven by the strategic imperative to outcompete China.

Instead of an imminent collapse, the credit market is likely poised for a final surge in risk-taking. A combination of AI enthusiasm, Fed easing, and fiscal spending will probably drive markets higher and fuel more corporate debt issuance. This growth in leverage will sow the seeds for the eventual downturn.