Global brokerage firm Jefferies has warned that the artificial intelligence (AI) investment cycle is more likely to conclude due to market pushback against insufficient returns rather than spending cuts by US hyperscalers. The report highlights a significant wealth transfer from hyperscaler balance sheets to North Asia as a key turning point.
Wealth Transfer to North Asia
According to Jefferies, the combined market capitalisation of South Korea and Taiwan has more than tripled from US$3.2 trillion at the start of 2023 to US$9.8 trillion. This surge reflects how much AI capital expenditure is flowing to chipmakers and suppliers in the region. The brokerage argues that investors will eventually focus on this massive wealth transfer, leading to market pushback.
Hyperscaler Performance and Debt-Funded Capex
The four major US hyperscalers—Microsoft, Alphabet, Amazon, and Meta—have risen 180% since early 2023, outperforming the S&P 500 by 44%. However, they have declined 8.7% since late May and underperformed the index by 10.2% from their early-May relative high. Jefferies notes that these companies have issued US$144 billion in bonds so far this year, compared to US$83 billion in all of 2025, indicating that more capex is being debt-funded. The brokerage warns of "massive capital destruction, or malinvestment" if returns fail to materialize.
Geopolitical Risks and Energy Hedge
Outside AI, Jefferies flags geopolitical risks that markets are currently ignoring, including questions around the Iran Memorandum of Understanding and NATO's deepening involvement in the Ukraine conflict. The firm recommends owning some energy stocks as a hedge against these risks.
Australia: Rising Downturn Odds
In Australia, Jefferies sees increasing odds of a downturn. The Reserve Bank of Australia (RBA) has hiked rates to 4.35% to combat inflation, which stood at 4.0% year-on-year in May. Sydney home prices have fallen 3.7% over the past five months. A new federal budget from July 2027 will tax capital gains at marginal rates up to 47% and remove the negative-gearing deduction for new investment properties except newly built homes. The brokerage expects this to cause a sharp drop in property transactions and investor lending, which was still 43.4% of new NSW mortgages in the first quarter of 2026.
Macro Headwinds and Weak Productivity
Macro headwinds are compounded by weak productivity: real GDP per hour worked is down 5.1% since the first quarter of 2022. Stretched affordability is evident, with the national dwelling value at 8.4 times median income and 45.9% of income needed to service a mortgage.
Market Preferences and Concentration Risk
Jefferies favours an overweight position in resources over banks, noting that resources have outperformed banks by 54% since June 2025. The brokerage also highlights concentration risk in Asia, where tech hardware now accounts for 49% of MSCI AC Asia ex-Japan, making it harder for diversified portfolios to beat the benchmark.
