Debt financing in AI is a signal that the tech bull market is “getting weaker,” says Morgan Stanley CIO Morgan Stanley

The Meta agreement is the largest private debt deal ever, according to The Wall Street Journal. 80% of Hyperion’s data center in Richland Parish, Louisiana, will be owned by Blue Owl Capital, with Meta retaining only a 20% stake. The site would technically be owned by a special purpose vehicle and therefore would not appear on Meta’s balance sheet. Morgan Stanley was the bookrunner who put the deal together, According to Bloomberg.

Shalit said the deal represents a departure from the way artificial intelligence has been funded in the past. Previously, investment came directly from cash on the balance sheets of big tech companies. Now, with off-balance sheet debt in the picture, companies will be under increasing pressure to show a return on their investments, she said.

“In the first phase, in the first three years, Zuckerberg was building everything with the cash on his balance sheet, with free cash flow,” Shalit said, referring to Meta founder Mark Zuckerberg. “When you start using debt, and you’re using debt in the shadow banking market, which means you’re partnering with players in private credit where you’re using private wealth money, et cetera, et cetera, it becomes harder and harder to track, it becomes more and more impractical, and that creates pressure to actually earn that return on investment.”

Shalit also expressed some doubts about the high level of interconnectedness between AI companies and their suppliers. Earlier this month, Morgan Stanley analyst Todd Castaño and his team produced a diagram of what he called an “increasingly circular” AI ecosystem:

“In the last 30, 60, 90 days, the landscape has suddenly become a lot, a lot more complex,” Shalit said. “The deals and the back-and-forth have become more and more complex, where some of this is starting to look like a circular transaction, like seller financing. And I say this not because I think anyone does anything outrageous. I don’t do that. “But what I see is that what was a very simple story suddenly becomes much more complex.”

However, Shalit believes stocks “will rise… but we don’t think it will be this exponential boom.”

Along the way, she warned traders to be wary of an AI “accident.” For example, “it could be that OpenAI somehow doesn’t develop a real revenue model to pay for all this capacity that it has committed to buying from everyone,” she said.

In this case, there could be a 10-20% correction in the S&P 500, she said.

“Isn’t (generative) AI not going to pay off eventually? Maybe it will eventually pay off. But the path won’t be a straight line,” she said. “We’re not trying to beat the story. We’re not trying to say, ‘We’re entering a bear market,’ or anything like that. We think this has legs but we think the legs are getting weaker and weaker and weaker as the days go by.”

Meta and OpenAI have been contacted for comment.

Here’s a quick snapshot of the markets before the opening bell in New York this morning:

• Standard & Poor’s 500 Futures rose 0.62% this morning. The last session closed at an increase of 0.58%.
• Stokes Europe 600 It was flat in early trading.
• FTSE 100 index in the United Kingdom It was flat in early trading.
• Japan’s Nikkei 225 It rose by 1.35%.
• China CSI 300 It rose by 1.13%.
• South Korea Cosby It rose by 2.5%.
• India Nifty 50 It rose by 0.08%.
• Bitcoin Up to 111 thousand dollars.