The rush to fund artificial intelligence infrastructure is reshaping global capital markets and could leave interest rates elevated for years, macroeconomic analyst Stephanie Pomboy has warned, arguing that the technology boom is creating financial pressures that investors are underestimating.
Speaking to Thoughtful Money founder Adam Taggart, Pomboy said the unprecedented borrowing required to finance AI data centres, alongside mounting US government debt, was creating competition for capital that would keep Treasury yields elevated and raise borrowing costs across the economy.
“The bottom line is the higher for longer interest rate environment I think is very much here to stay, especially if you’re bullish on AI and this whole capex boom because that’s going to feed this crowding out phenomenon that’s putting upward pressure on Treasury yields,” she said.
She argued that while equity markets continue to celebrate strong earnings from large technology companies, the reported profits mask structural weaknesses.
Using Amazon as an example, Pomboy said a large portion of earnings growth reflected accounting gains rather than cash generated from operations.
“You’ve had this massive investment income story,” she said, noting that mark-to-market gains on investments such as Anthropic were being recorded as earnings despite producing no immediate cash flow.
“The bottom line is the higher for longer interest rate environment I think is very much here to stay, especially if you’re bullish on AI and this whole capex boom because that’s going to feed this crowding out phenomenon that’s putting upward pressure on Treasury yields”
“It gets factored into the earnings numbers even though it’s not actually money that they earned. It’s paper gains that they won’t realise until they actually sell.”
Pomboy said investors should also pay closer attention to the deteriorating cash position of major technology companies as AI investment accelerates.
“Free cash flow has actually gone negative for a lot of these companies, if not all of them,” she said. “These were the cash cows. They were awash in cash.”
She argued that technology companies are increasingly relying on debt markets to finance AI infrastructure while the cost of borrowing continues to rise.
“The private sector has borrowed thus far this year the same amount as the federal government, which is just mind-boggling when you think about the amount of paper the federal government has to roll,” she said.
According to Pomboy, this surge in corporate borrowing is occurring alongside an expansion in equity issuance, reducing one of the major supports that has underpinned sharemarkets over the past decade.
“Companies have stopped buying back shares. They are now net issuers of stock,” she said, describing it as “another huge negative for the stock market” after years in which buybacks provided a steady source of demand for equities.
She believes investors are overlooking these pressures while focusing on headline earnings.
“The markets are being rather insouciant about a lot of these risks out there and are glomming onto profit numbers that aren’t all that they appear on the surface,” she said.
Pomboy also questioned whether financial markets have adequately accounted for the long-term costs associated with AI infrastructure, including depreciation of massive investments in data centres and computing equipment.
Looking beyond technology, she argued that structural forces such as deglobalisation, reshoring of manufacturing and sustained fiscal deficits point towards a prolonged period of higher inflation and higher interest rates.
“The direction of travel for oil and commodity prices more broadly long term is higher,” she said, adding that a world becoming less dependent on global supply chains would naturally become more inflationary.
That environment, she said, could favour commodities and other hard assets over financial assets.
“We’re just issuing stocks and bonds hand over fist whether it be the private sector or the government,” she said. “Having hard assets that just can’t be manufactured out of thin air strikes me as an investment with a very appealing attribute.”
Pomboy maintained that the United States could ultimately emerge stronger if it succeeds in rebuilding domestic manufacturing and critical industries, but said the transition would require unwinding years of financial excess.
“If we got back to some semblance of reasonable valuation, we would be setting the table for a phenomenal next several decades,” she said.
Even so, she cautioned that the adjustment would not be painless.
“It’s going to be a problem,” she said. “If we can resist the temptation to just print money like crazy to numb the pain, I think we’ll be much better for it.”
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