1Q26_ Quarterly Outlook Report_Final_EN - Flipbook - Page 130
T H E P LUMB LI N E | A RETU RN TO F I RS T PRI N CI PL ES
Step-up in intensity (CapEX as a % of sales) for the top 10 constituents reflects marked increase
in AI-related CapEX
81.9%
63.4%
36.6%
18.1%
2020
2021
2022
CapEx- intensity top 10
2023
2024
2025E
2026E
CapEx intensity - rest of S&P 500
Sources: Bloomberg Finance LP, Scotia Wealth Management
The surge in AI spending has exposed risks in the form of partnerships and related funding
arrangements, however. Many of the industry leaders are deeply interconnected, relying on each
other for chips, cloud capacity and model development. Nvidia’s $100 billion commitment to
OpenAI exemplifies this dynamic, as some of the capital will return to Nvidia through chip
purchases. Many of these agreements also lack firm timelines, creating execution risk if spending
is delayed or scaled back. Given a backdrop of elevated spending and valuations in certain
segments, selectivity is warranted with a preference for companies demonstrating durable free
cash flows and balance-sheet strength rather than speculative AI narratives financed with debt.
We see other reasons to be constructive on U.S. equities outside of AI-related stocks, with more
tangible policy tailwinds for Financials and selective support for consumer-linked sectors.
Financials may benefit from the Trump administration’s bank regulatory agenda, which aims to
ease capital and compliance burdens and create a more supportive environment for lending and
M&A, supporting profitability and balance sheet growth. U.S. consumer-facing industries could
also see some benefit from the One Big Beautiful Act, where tax cuts and stimulus cheques have
the potential to lift household incomes and spending power, although the ultimate impact will
depend on how much of this support is saved versus spent. Complementing these fiscal measures,
monetary policy is shifting in a more accommodative direction as continued rate cuts from the
Federal Reserve ease borrowing costs and lower interest rates on mortgages, auto loans, and credit
cards. This has the potential to help household budgets, particularly for middle-income families
facing higher reset costs, and can create room for higher consumer spending.
However, a cooling labour market and persistent affordability pressures remain significant
headwinds, especially for discretionary demand. If inflation continues to cool while wages broadly
hold, real incomes should improve, but we expect any recovery in consumer spending through
2026 to be gradual and uneven rather than a straightforward tailwind for the entire consumer
complex.
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