"“There will be a breaking point, but until then, a closed strait actually fuels the AI bubble trade, in our view. You can't own anything but AI-that's how a bubble forms. We expect limited downside until either growth slows, core inflation meaningfully accelerates, or if the war evolves into a hot war,” he told clients on May 12."
"“Don't fight the tape. Own AI. Sentiment is euphoric, but given that the rally has been driven by strong EPS momentum, we don't see much downside risk yet.”"
"Kwon drew a comparison with the “railway mania” bubble of the mid-1800s, when railroad companies raised vast sums to build train networks before their over-valued stocks collapsed."
"The bank estimates that Q1 2026 AI capex totalled $174 billion, up 72.8% from the year before. Capex “drove 42% of 1Q GDP growth and was 2.4% of total US GDP,” Kwon said. “It's expected to surpass those peaks by 4Q26, reaching 3%, based on consensus Hyperscaler capex. At some point, other parts of the economy will have to grow to support capex. Railroad investments peaked at ~3% in the 1850s.”"
AI capex is expanding rapidly and is large enough to drive investor positioning toward AI equities. Wells Fargo views the AI rally as supported by strong earnings-per-share momentum and expects limited downside until growth slows, core inflation meaningfully accelerates, or conflict escalates into a hot war. External pressures such as a closed Strait of Hormuz, higher oil prices, and rising inflation are seen as complicating conditions for other sectors, while AI demand continues to strengthen. The bank compares the current cycle to historical bubble dynamics, including railway mania, where heavy investment preceded stock collapses. AI capex is projected to keep rising, potentially reaching levels comparable to prior investment peaks.
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