Third Quarter 2026: If You Build It, They Will Come, Eventually, Maybe
Third Quarter 2026: If You Build It, They Will Come, Eventually, Maybe
One of my favorite movies growing up was the 1989 classic, Field of Dreams, starring Kevin Costner as an Iowa farmer. I grew up working on a farm and my boss was an avid collector of antiques. When I wasn’t working on the farm, I was helping a local antique dealer buy and sell his wares at farm auctions and flea markets. I loved baseball and especially baseball history. I collected baseball cards, old gloves, old bats and any old advertisements or trinkets I could find that featured baseball. This Field of Dreams movie seemed like it was tailor made just for me! The fictional story starts off with Kevin Costner’s character hearing a God-like voice telling him to build a baseball field in his corn field for baseball legend Shoeless Joe Jackson (played by Ray Liotta). Shoeless Joe played in the early 1900’s and was most known for being banned from baseball for his tacit involvement in the 1919 Black Sox game-fixing scandal. The voice kept repeating “if you build it… he will come” and it became a famous tagline, though almost always misquoted as “if you build it… they will come.” In the movie, the farmer does build the field, and he eventually sees ghosts of old baseball players coming out to play ball. Not everyone could see these ghosts, but at the movie’s closing, hundreds of people were in attendance to watch the ghosts play and there were streams of cars coming down the road to join them.
The market news and subsequent price swings in recent months are all focused on the race to build out AI infrastructure. Much like the movie, the CEO’s at large tech companies are preaching to their shareholders that if they build it (large data centers), productivity and unimaginable riches will come. The large hyperscaler companies in the US are projected to spend over $1 trillion in 2026 alone. In order to justify the projected $10 trillion in spending out to 2030, these companies would need to see at least $3 trillion in annual revenue by 2030. That level of revenue compares to $3.4 trillion that the entire world currently spends on energy, including oil, gas, coal, electric grids, solar, wind and nuclear energy. This better be revolutionary or there is going to be a rude awakening for current investors in this space!
The hyperscalers are spending 100% of their profits and doubling down by issuing massive amounts of new debt. As of this writing, corporate debt issuance by the AI industry is over 30% of the size of the US Treasury debt issuance and is expected to continue to rise. They really don’t care what interest rate they must pay to issue this debt. They need the money. This drives up the yield the US Treasury must pay to compete for capital. The 30-year Treasury bond is now yielding 5.3%. As rates rise, it costs more to finance our now $40 trillion national debt, crowding out resources for social safety net spending like Social Security, Medicare and Medicaid. The largest component of the recent tax cuts was aimed at incentivizing investment in new capital projects. Generous one-time depreciation write-offs were enacted, which allow large tech companies to use their data center investments to offset taxable income immediately. As a result, government revenue from tax collection has dropped while these data centers are driving up costs for energy and straining our already inept electric grid.
Why are we gambling so much on AI data centers and accepting their costs to society? We are told AI will unleash productivity and wealth, yet the current data show no improvement outside the tech sector. Sales per worker are rising for the Magnificent 7 (the seven largest US tech companies), but remain flat for the other 493 companies in the S&P 500 Index. Over the past decade, Magnificent 7 profit margins have risen from about 10% to 25%, while margins for the remaining companies have stayed near 10%. Productivity figures have shown no improvement and hyperscalers have yet to show a return on investment. Thus far, AI adoption has been slower than promised despite being mostly free to the public. Meanwhile, investors have bid up the price of these seven companies to 40% of the total value of the S&P 500. Because many stock investments track this index, future market returns are increasingly dependent on seven companies and a payoff from their massive bet on data centers.
We remain concerned that data centers may become commodities like utility companies. The AI breakthrough was led by Large Language Models (LLMs) being able to consume lots of data. However, this model is expensive. Small Language Models (SLMs) are being developed to do some of the computational work at much lower costs in smaller localized servers and in the processors on user devices. We have also seen corporations shift their spending on AI recently from expensive data center driven models to less powerful, but much cheaper Chinese models. Market forces will govern this technological revolution, just like those that preceded.
Market Review and Outlook
The S&P 500 Index rose 2.3% in the third quarter and is up 12.7% year-to-date. Developed International stocks are up 10.3% year-to-date and Emerging Market stocks are up 23.4% year-to-date. Gold recovered 3.5% for the quarter, but is still down 3.7% for the year. Foreign investors have been buying AI related stocks and bonds, but they must first convert their currency into US dollars. This has driven up the value of the dollar and Gold often trades inverse to the dollar. We remain bullish on Gold in our portfolios, despite this recent weakness.
We remain underweight large US tech companies. There are no imminent concerns that data center spending is going to slow down or that investors are going to sour on AI stocks. However, chasing further gains feels like picking up nickels on the track in front of a speeding train. We currently favor investments in the real economy that are benefiting from the massive AI spending. This includes companies that improve the electric grid, energy companies, materials companies, HVAC companies, physical industrial metal commodities and cybersecurity firms. We continue to favor non-US investments trading at a discount, which may benefit from a weaker US dollar. We are significantly underweight bonds out of concern for rising interest rate. Please feel free to set up a meeting time to review your portfolio and any questions you may have.
Cordially,
Shane M. Alsworth, MBA, CFP®, CLU®, CIMA®
The views and opinions presented in this article are those of Shane Alsworth only (disclosures on back)
Sources: Morningstar/Ibbotson data, BCA Research, Advisor Intelligence, iMGP, Apollo Global Management, Nonconsensus
*US large stocks (S&P 500 Index), US large-cap growth (Russell 1000 Growth Index), US large-cap value (Russell 1000 Value Index), US small stocks (Russell 2000 Index), developed international stocks (MSCI EAFE Index), emerging market stocks (MSCI Emerging Markets Index), core investment-grade bonds (Bloomberg U.S. Aggregate Bond Index), floating rate loans (S&P/LSTA Performing Loan Index), US Dollar (DXY Index), gold (Aberdeen Physical Gold ETF), commodities (Bloomberg Commodity Index)
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