$1 trillion AI spending spree faces reckoning, BIS warns

KUALA LUMPUR, 21 JULY 2026 —

The Bank for International Settlements says the $1 trillion rush to spend on artificial‑intelligence infrastructure risks ending in a sharp pullback and a recession, drawing parallels with past manias that ended in busts.

The five largest hyperscalers are on track to plough more than $1 trillion into AI-related capital expenditure across 2025 and 2026, the BIS says. That outlay already exceeds their collective earnings and free cash flow, forcing some to issue debt to cover the shortfall.

The concern is not that AI itself is fraudulent—the report acknowledges task-level studies show productivity gains of 20% to 50% in time savings—but that every major player is making the same bet at once on the assumption that only a handful will dominate.

“The intense competition raises the risk of firms over-committing resources to investment projects with still uncertain returns,” the BIS warns, “leaving all firms vulnerable to disappointments in AI payoffs.” Using contest-theory modelling, its economists find the net economic surplus for the sector—total payoffs minus investment costs—declines as capex rises and could turn negative in adverse scenarios.

A shortfall in returns “could trigger a sudden pullback in financing and turn the capex boom into a protracted investment bust.”

The danger lies not only in the scale of spending but in how it is financed. Hyperscalers, chipmakers and AI labs are intertwined through “a complex web of private arrangements,” the report says. Prominent among these is circular financing: hyperscalers take equity stakes in AI labs, which in turn commit to multi-year chip purchases from the same hyperscalers. Data-centre contractors build facilities that are leased back on long-dated contracts with embedded exit clauses.

“The terms of such deals are typically poorly disclosed,” the BIS writes, “with risks of the same asset being pledged multiple times.”

If hyperscalers slow or halt their aggressive capex, the supply chain—infrastructure contractors, chipmakers, AI labs and the private credit lenders behind them—would face simultaneous revenue shortfalls. Engineering and construction firms at the end of that chain carry “comparatively weak” balance sheets with little cushion against a sudden reversal, the BIS says.

Zhang Tao, the BIS’s Asia-Pacific representative, told the South China Morning Post that a correction could unwind “much faster than previous banking crisis episodes” because so much financing flows through hedge funds and private credit vehicles that face less regulatory oversight than traditional banks.

Wall Street has already sounded alarms. Apollo Global Management chief economist Torsten Slok argued in mid-May that AI was “penetrating every corner of financial markets,” with an equity phenomenon mutating into a capital-markets-wide transformation. AI now accounts for nearly half of all investment-grade bond issuance, 87% of venture-capital funding and a growing slice of high-yield debt.

The shock waves would not be confined to Silicon Valley. U.S. stocks now make up roughly 64% of the MSCI Global index, and household equity exposure has more than doubled relative to income since 2010. A sharp repricing of AI-linked equities “could have more pronounced wealth effects and sharper consumption pullback than in the past,” the BIS warns. Given the U.S. market’s global footprint, the wealth destruction would ripple internationally.

Direct-lending funds—already a $1 trillion-plus ecosystem—have quadrupled their lending to the AI and information-technology sectors over the past five years, now accounting for about 15% of their portfolios. Early signs of stress are visible: some retail-facing direct-lending funds have faced mounting redemption requests, forcing asset liquidations. “A larger shock, whether from a renewed inflation surge or a sharp AI-led repricing, could trigger a more widespread credit crunch,” the report cautions.

The AI risk is not isolated. The BIS notes a second shock that struck in early 2026: the closure of the Strait of Hormuz following the start of the Iran conflict in late February, which removed more than 10 million barrels of crude oil per day from global supply—a larger disruption than the 1973 oil embargo or the 1979 Iranian revolution.

Oil prices jumped 67% to an intraday peak of $120 a barrel within two weeks; fertiliser and plastics prices both soared 50%. Global headline inflation has climbed by half a percentage point since the conflict began.

Energy and AI interact uncomfortably. Markets have remained buoyant—equity valuations rich, credit spreads compressed—on the assumption that the Hormuz disruption is temporary and the AI boom will endure. But if inflation proves stickier than expected and central banks raise rates, the very tightening needed to contain energy-driven inflation could puncture the AI-financed debt bubble.

“The current tension between exuberant risk appetite and elevated macroeconomic risks could unwind abruptly,” the BIS writes.

The BIS refrains from calling the AI boom a bubble outright. Instead it urges “robustness”—a term it repeats—to guide policymakers beyond the fragile “resilience” the global economy has shown so far. That means central banks remaining vigilant on inflation even when it is politically uncomfortable, governments restoring fiscal space rather than deploying stimulus, and regulators extending prudential standards to the non-bank financial institutions now at the heart of AI financing.