AI capex boom loses momentum as investors demand clear profit path: Milken Institute's William Lee

Addressing the shift underway in the artificial intelligence (AI) trade, William Lee, Chief Economist and Executive Director at the Milken Institute, says that the wave of large capital expenditure in the sector seems to be "fizzling out" as investors reassess the scale of required hardware spending. Markets, he said, are now asking: "Where's the cash flow that's associated with the profits that come out of all this?"

The reaction to Oracle’s stock slide after it announced further capex without a clear return plan, he noted, is emblematic of the changing mood.

Higher interest rates are accelerating this correction. Lee said the rate environment is beginning to separate speculative ventures from viable ones. "As interest rates stay at the relatively high level, it sorts out the cats and dogs in terms of investments from the good investments." The period when companies could attract capital simply by attaching an AI label appears to be fading.

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Lee said Federal Reserve Chair Jerome Powell has a "tough job" managing signals that point in different directions. Gross domestic product (GDP) growth looks firm, but the labour market is "weakening fairly rapidly." He argued that the Fed is still fighting "last year's battle" on inflation, which he described as a temporary "bulge" driven by tariff effects that should ease within the usual policy lag.

Lee said the balance of risks has shifted. "The risks for a downside on the labour market is much greater than the upside on inflation." He added that Powell appears to be laying the groundwork for a larger rate cut, possibly 50 basis points, to be delivered earlier than markets expect. According to him, the case for moving rates to the "low side of normal" is strengthening as labour trends deteriorate.

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On geopolitics, Lee pointed to Venezuela as a key flashpoint for US energy security. He said American refineries depend heavily on heavy crude and noted that "the United States is very much dependent upon the kind of oil that Venezuela produces." He added that this reliance is partly self-inflicted because environmental rules have slowed refinery upgrades that would allow greater use of lighter shale oil. Given the mix of energy needs and US concerns about drug trafficking, Lee said these intertwined interests could "tip the balance for more action in Venezuela rather than less action."

For the full interview, watch the accompanying video

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