AI's Growing Risks: Capital Intensity, Token Pricing, and the Cracks Emerging in the AI Boom

The stock market continues to power higher despite growing concerns about inflation, geopolitics, and the sustainability of the artificial intelligence boom. While investors remain captivated by AI's promise, the underlying economics of the industry are beginning to raise serious questions.

During a shortened trading week, several major developments highlighted both the opportunities and risks facing investors. From the ongoing conflict involving Iran to SpaceX's blockbuster IPO and troubling news for AI company Anthropic, the market offered plenty of reasons to reassess where we stand in the AI investment cycle.

Markets Rally After Iran Agreement Announcement

Markets began the week on a strong note after President Trump announced that a preliminary agreement had been reached with Iran.

The announcement sparked optimism among investors:

• Oil prices fell roughly 5%

• The 10-year Treasury yield moved back below 4.5%

• Stock futures surged, leading to a broad market rally

However, investors should recognize that this agreement is not a formal peace treaty. Instead, it is a memorandum of understanding designed to facilitate negotiations over the next 60 days. Major issues, including Iran's nuclear program, remain unresolved.

While the temporary reopening of the Strait of Hormuz could ease energy concerns, substantial geopolitical risks remain.

The Federal Reserve Signals a Tougher Stance

The Federal Reserve held interest rates steady during its latest meeting.

More importantly, the Fed indicated that rate cuts are unlikely in the near future. In fact, officials suggested that additional rate hikes remain a possibility if inflation pressures persist.

The market reacted negatively to this message, reminding investors that monetary policy remains one of the most significant drivers of asset prices.

SpaceX IPO Pushes Valuation Into the Stratosphere

One of the biggest events of the week was the long-awaited SpaceX IPO.

The stock initially rose 19% on its first day before adding another 25% over the following sessions. The rally pushed SpaceX's market capitalization to approximately $2.5 trillion.

That valuation raises important questions:

• SpaceX now trades at over 100 times trailing annual revenue

• Investors appear to be pricing in years of future success

• Expectations surrounding the company's AI ambitions are becoming increasingly important

While SpaceX remains an extraordinary technological company, the valuation assumes near-perfect execution across multiple industries.

Homebuilders Benefit from Lower Rates and M&A Activity

The homebuilding sector has quietly improved in recent weeks.

Two factors have driven the recovery:

Falling Treasury Yields

Mortgage-sensitive stocks typically perform better when long-term interest rates decline. The move below the critical 4.5% level on the 10-year Treasury has provided support for builders.

Acquisition Activity

Recent transactions suggest consolidation may be accelerating within the industry.

Many deals are occurring at:

• 1.25x to 1.3x tangible book value

This has helped lift valuations for publicly traded builders such as Meritage Homes, which has rebounded significantly after earlier weakness.

Private Credit Continues to Show Signs of Stress

Private credit remains one of the more concerning areas of the financial markets.

This week, BlackRock capped redemptions from its HPS Corporate Lending Fund after investors requested withdrawals exceeding allowable limits.

Investors attempted to redeem:

• 13% of fund assets

• Up from 9.3% in the prior quarter

The growing demand for liquidity suggests increasing nervousness among investors in private credit products.

Anthropic Faces a Major Setback

Perhaps the most significant AI-related development involved Anthropic.

The U.S. government issued export-control restrictions affecting Anthropic's most advanced models, Fable 5 and Mythos 5.

The directive effectively suspends access to these systems for foreign nationals and creates major operational challenges for the company.

The restrictions reportedly stem from concerns that security protections built into the models could be bypassed through so-called "jailbreak" techniques.

For Anthropic, the consequences could be severe:

• Reduced deployment of advanced models

• Greater regulatory scrutiny

• Increased competitive pressure from rivals

The episode also signals a shift in Washington's approach toward AI regulation. Until now, policymakers had largely taken a hands-off stance.

The AI Bull Case Remains Intact

Despite growing concerns, AI spending shows no signs of slowing.

The strongest evidence remains Nvidia.

The company's most recent quarterly results showed:

• Revenue growth of 85%

• Acceleration from prior quarters

• Continued demand from hyperscalers

Major technology companies continue increasing AI-related capital expenditures.

As long as Nvidia's growth remains this strong, it becomes difficult to argue that the AI boom has ended.

The Bear Case for AI Is Getting Stronger

While AI enthusiasm remains high, several important risks have become increasingly difficult to ignore.

1. Capital Intensity Is Exploding

Historically, software businesses were attractive because they required relatively little capital.

That is changing rapidly.

Google recently announced plans to raise $85 billion in new equity capital.

Why?

Because AI infrastructure costs are becoming enormous.

The company is expected to spend:

• $180–190 billion on AI-related capital expenditures in 2026

This represents a dramatic shift from software economics toward hardware economics.

2. AI Lacks Strong Competitive Moats

Despite hundreds of billions of dollars in spending, AI products remain surprisingly similar.

One week:

• Gemini leads

The next:

• OpenAI leads

Then:

• Anthropic leads

The lack of clear differentiation raises concerns that AI could become a commodity business.

3. Pricing Pressure Has Already Arrived

Perhaps most surprising is that OpenAI is reportedly considering lowering token prices.

This is remarkable because:

• Trillions are being invested

• Competition remains intense

• Companies have yet to prove sustainable profitability

Falling prices before the market fully matures is rarely a positive sign.

4. Customers Are Rebelling Against Token Pricing

AI companies initially attracted users through inexpensive subscription models.

Now many providers are shifting toward token-based pricing.

Users are beginning to notice the true costs.

Examples include:

• Uber exhausting its annual AI budget in just four months

• Businesses reporting unexpectedly large AI expenses

• Online communities filled with complaints about rising costs

If customers become more cost-conscious, AI adoption rates could slow.

5. ROI Remains Unclear

Despite enormous enthusiasm, clear evidence of meaningful returns on AI investment remains limited.

Companies continue spending aggressively, but many have yet to demonstrate measurable productivity gains that justify the investment.

6. Power Constraints Are Becoming Real

AI data centers require:

• Massive electricity consumption

• Significant water resources

• Extensive infrastructure investments

Local communities are increasingly resisting large-scale projects.

Delays in data center construction could become a major bottleneck for future AI growth.

The New AI Analogy: Airlines vs. Suppliers

One useful way to think about the AI industry is through the lens of the airline business.

Airlines themselves often struggle because:

• They require huge capital investments

• Competition is intense

• Pricing power is limited

Yet suppliers to airlines often thrive.

The same dynamic may emerge in AI.

Instead of focusing on hyperscalers and AI model providers, investors may find better opportunities among:

• Semiconductor manufacturers

• Power-generation companies

• Network infrastructure providers

• Equipment suppliers such as Arista and Cisco

If AI becomes commoditized, suppliers may ultimately capture more value than the companies offering AI services directly.

Final Thoughts

The AI story remains one of the most important investment themes of this generation. The bullish case remains supported by unprecedented spending and explosive demand for computing power.

However, investors should no longer ignore the growing risks.

Capital requirements are rising dramatically. Competition is intensifying. Pricing pressure is emerging. Regulatory scrutiny is increasing. And customers are beginning to question the costs.

The next phase of the AI boom may not be determined by technological breakthroughs alone, but by whether the industry's economics can justify the trillions of dollars being invested.

That question remains unanswered.

Thanks for reading this week’s wrap.
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This post is for informational purposes only and does not constitute investment advice. Please consult a licensed financial adviser before making investment decisions.