8 June 2026: Weekly Update – The Capex Cycle's Moment of Truth

For the cycle to become self-sustaining, the capital deployed must generate returns in the form of AI-driven revenues at scale: tokens consumed, inference demand met, productivity gains monetised. Those output-side revenues have not yet grown to a scale commensurate with the capital already committed. Until they do, the earnings trajectory that justifies current multiples requires the capex cycle to keep expanding. What the Broadcom guidance hesitation likely communicated to the market is that the expansion is approaching a limit, before the output revenues have grown large enough to take over as the primary engine. We continue to retain exposure to the AI theme through specialist managers, and nothing here challenges the long-run case for the technology. The question, as always, is whether the price of these companies holds up relative to what they must now prove.

Answering that question became harder this week. Two centrist US Federal Reserve policymakers made openly hawkish statements. One suggested that policy is not meaningfully restraining the economy. This is closely related to the argument above: when the perceived strategic cost of falling behind in artificial intelligence exceeds the financial cost of capital, rate rises that would discipline an ordinary investment cycle are simply absorbed. The Fed has been pushing against a tide of committed capital expenditure that has its own momentum. Into this, Kevin Warsh will chair his first FOMC meeting on 16-17 June - inheriting a divided committee, a labour market running well above trend, and an energy backdrop that is hardening from a temporary shock into something more lasting.

Beneath all of this, the more mundane healthcare, insurance, water and waste, and value equity holdings within the T. Bailey funds of funds moved through the week largely on their own terms. Their earnings are not contingent on a capital cycle validating itself through future token consumption. Drug revenues, treated water volumes, insurance premiums and tipping fees are the proceeds of things already sold - not promises about what artificial intelligence might eventually generate. The valuation gap between healthcare and technology equities, which we discussed here, narrowed fractionally this week but remains historically extreme.

The businesses that require only that they continue doing what they have always done tend not to feel rewarding in weeks when everything is going up. They tend to feel rather more important in portfolios during weeks like this one.