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By now, everyone is aware that we are living through the era of Artificial Intelligence. AI stock returns have been impressive. Businesses are changing the way they operate, realizing that many entry-level positions can be eliminated. Entire industries are being rebuilt from the ground up. Whether that’s progress or cause for concern is up for debate — but there’s no question the ground beneath us is moving.
But just how impactful has AI been on the markets? Since ChatGPT was launched in November 2022, AI-related stocks have accounted for:
- 75% of S&P 500 returns
- 80% of earnings growth
- 90% of capital spending growth
And the effects are not limited to Wall Street.
- AI data center construction has now surpassed office building construction.
- Roughly 70% of 2024’s increase in electricity demand came from data centers.
And we’re starting to see some loony business deals to keep this party going.
Oracle recently announced it would receive $60 billion a year from OpenAI (revenue OpenAI doesn’t yet generate) to deliver cloud computing capacity Oracle hasn’t yet built. Meeting that commitment would require roughly 4.5 GW of power, equivalent to 2.25 Hoover Dams or 4 nuclear power plants. No biggie.
It’s Frothy Out There
It’s hard to argue that stock valuations aren’t stretched. The Buffett Indicator is above 200%. The CAPE Ratio is above 40. The S&P 500 P/E ratio sits around 26x earnings.
A drawdown this year or next would not surprise me. These companies are deploying massive amounts of capital, and some (probably most) won’t see a return on their investment.
It’s All About Earnings Growth
That being said, stock market performance is likely to continue doing well as long as there is earnings growth. And as we already pointed out, the AI boom is pretty much responsible for this current market rally. They have been seeing massive earnings growth.
Will it continue? Who knows. But we are clearly in the middle of an AI arms race, and there’s little sign of it slowing. Up until now, U.S. tech companies have funded their AI infrastructure with free cash flow. That changed with Oracle.
“Oracle has broken the pattern. It is willing to leverage up to hundreds of billions to seize a share. The stable oligopoly is cracking… The implications are profound. Amazon, Microsoft, and Google can no longer treat AI infrastructure as a discretionary investment. They must defend their turf. What had been a disciplined, cashflow-funded race may now turn into a debt-fueled arms race.” — Doug O’Laughlin, Fabricated Knowledge, Sept 2025
So, the boom continues for now. But piling on debt at this scale is hardly a sign of prudent fiscal management. Companies are betting that this will be a winner-takes-all market. And they might be right. They are playing this game as if the company with the most capable product will capture the lion’s share of the market.
It’s happened before. In the search engine wars of the late 1990s and early 2000s, early leaders like Lycos, Microsoft, Netscape, and Yahoo dominated search until Google entered and quickly claimed the market.
Takeaway
Revolutions, like the one we are currently experiencing, rarely unfold in straight lines. We can expect to see overinvestment, market corrections, and a widening gap between winners and losers.
For those who are invested, this will mean two things.
First, buy the field, not just a single crop. We do not know who will win this race. The company/ies that emerge as the winner will compound returns for years. And the losers will fade into irrelevance.
Second, don’t confuse growth with guaranteed returns, especially when valuations, leverage, and expectations are already stretched.
Stay disciplined and be sure to manage your risk.
