The AI Arms Race: How Capex May Signal a Value Rotation

Artificial intelligence (AI) has been around for over a decade, but only recently has it become mainstream—capturing headlines and attracting massive investment from governments, institutions, and individuals. Like the internet before it, AI will reshape economies and societies. The race to capture this enormous market has sparked staggering capital investment, with major players leapfrogging each other in AI development. This raises two key questions: Will these investments pay off? And will AI be dominated by a single winner, or will it support multiple players? History may not repeat exactly, but past breakthroughs offer valuable clues for what’s ahead.

One of the clearest parallels to today’s AI boom is the internet buildout in the 1990s. Similar to today, it required massive upfront capital investment. During the internet era, U.S. broadband providers nearly doubled their capital expenditures (capex) as a percentage of GDP in just five years (1996-2000). 

Capex growth proved unsustainable, and spending fell sharply, from 1.05% of GDP in 2001 to 0.66% one year later, triggering the dot-com bubble burst. Many companies were left with excess capacity and assets that didn’t generate expected returns. Growth investors enjoyed dramatic gains during the capex investment surge, but as spending slowed, growth stocks suffered steep drawdowns while value stocks rebounded (lower-right chart). 

Today, we see a similar pattern in the AI sector. Over the last two years, the 12-month trailing capex as a percentage of GDP has doubled as the hyperscalers race to build the infrastructure for the next wave of technological transformation.

Alongside the surge in capex, market enthusiasm has far outpaced actual technology adoption. Historically, stock valuations often price in future growth before it materializes. This sets the stage for “indigestion” periods, when markets adjust to slower adoption or disappointing results. The internet bubble is a classic example: Prices soared on expectations for a digital revolution, but companies failed to deliver, triggering sharp corrections. The Nasdaq peaked in March of 2000 and didn’t reclaim that level for 15 years. 

Consider the plight of Netscape. It captured early investor excitement given its first-mover’s “right to win,” but Microsoft leveraged its scale and distribution by bundling Internet Explorer with Windows, crushing Netscape’s advantage. Netscape’s growth narrative collapsed, and it was sold to AOL in 1998 for a fraction of its peak market value. 

OpenAI, parent of ChatGPT, may be experiencing a “Netscape moment.” Like Netscape, OpenAI is a first mover but its $1.4 trillion compute obligations seem economically unrealistic, far beyond what organic cash flow could likely support—leaving it reliant on external financing. Meanwhile, Google (like Microsoft 25 years ago) is flexing its incumbency advantages with Gemini 3. This exposes a fault line in the AI arms race, likely risking those reliant on OpenAI achieving its capex ambition. If expectations unravel and the market proves “winner takes all,” we could see a sharp capex pullback and a broad revaluation of AI and growth stocks—echoing the dot-com implosion.

The AI boom mirrors the internet bubble as companies pour billions into data centers and hardware, betting future demand will justify the investment. As with the internet, the enthusiasm for AI has fueled a substantial capital cycle, benefitting a broad array of infrastructure providers. However, as investors begin to call into question the sustainability of this capex, the risk of indigestion looms large. For investors, the challenge is separating sustainable growth from speculative excess. As the cycle matures and spending rationalization takes hold, we fully expect a change in market leadership.

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