Investors are turning cautious on US tech mega caps as they grapple with surging capital expenditure needs, casting doubt on whether the premium attached to these stocks in the AI super cycle has become detached from fundamentals.
Instead, they are increasingly turning their attention to emerging markets equities where they have the opportunity to buy into the AI hype at a much lower price.
Jeffrey Schulze, head of economic and market strategy at ClearBridge Investments, told the Top1000funds.com Fiduciary Investors Symposium at Harvard that US technology companies are tapping both equity and debt markets at the moment to fund their capex needs.
The big five US “hyperscalers” – Amazon, Google, Meta, Microsoft and Oracle – issued $121 billion in corporate bonds in 2025, versus an average of $28 billion annually between 2020 and 2024, according to a Bank of America Securities report this January, and that number is expected to increase further in 2026.
“The high end of the S&P 500 [is mispriced] – and again, these are not capital-light companies anymore, they are very heavy capex. They’re tapping the debt markets, and you’re going to start to see the belly of the curve push out because of all the hyperscaler issuance you’re going to see this year,” Schulze said.
“The premium that those companies are commanding right now is not commensurate with how they’re conducting their business, and the uncertain payoff that you’re going to see with AI.”
Several market forces have determined the US’ historically high premium. For one, US stocks tend to be more growth-oriented and defensive; but a second and less discussed reason is the belief that US Federal Reserve will “backstop” any financial crisis that poses a serious threat to the market, as demonstrated by its actions during the GFC, Schulze explained.
This means that not only will US stocks carry a premium, but US fixed income will also present a tighter spread.
But emerging markets also have several advantages. For one, they house the world’s biggest semiconductor companies, which grant a so-called “pick-and-shovel” exposure to the AI theme, and there is a mismatch between their earnings and stock prices.
“Coming into this year, expectations for 2026 earnings for EM, compared to today, are up 28 per cent. In the US it’s up 7 per cent, Europe and Japan are up 3 per cent, and I see more room to the upside for emerging markets,” Schulze said.
But emerging markets can also lean on their traditional strengths in commodities. “A lot of the materials-rich bourses, like LATAM countries, like Indonesia, I think they have an opportunity for further upward revisions in their earnings,” he said.
Bullish on EM
Paul Marcussen, New York-based lead portfolio manager at the Norwegian sovereign investor Norges Bank Investment Management, said the $2.1 trillion fund has historically had an underweight exposure to the US and market-cap-neutral exposure to the Magnificent Seven, using overlays to offset the overweight positions its managers might take in them.
While Marcussen is cautious around the economic setting for emerging markets in the next nine to 12 months due to higher rates in the US, he is “quite bullish” on emerging markets over the long-term.
Finding the right approach to China – which for NBIM is active management – is a big part of being successful in emerging markets, he said. Even though China’s GDP reached its peak in dollar terms in 2021 and its share as a part of the global GDP has been shrinking, it’s still the most significant part of developing markets.
“We separate our beta decision from our alpha decision. In a country like China, we believe there’s great alpha potential for the managers that are capable of going there. The beta part is more tricky because the index is dominated by SOEs, and those SOEs are not aligned with US shareholders,” Marcussen said.
“As an example, in the last 13 years since March 2013, which is when Xi [Jin Ping] came to power, the GDP has grown 159 per cent, EPS has grown 13 [per cent]… That is a massive difference.
“However, alpha is quite easy to get by, and we deliver about 5 per cent per year in alpha in China, so for us that’s a great way of allocating active risk.”
Brad Calder, managing director and head of equities at The Investment Fund for Foundations (TIFF), added that active management is also the approach that makes more sense in developing countries with a heavy technology thematic. TIFF provides outsourced chief investment officer services for more than 100 endowments and foundations.
“With respect to other countries, suppose you do want to diversify outside of the United States… within the public equity markets in most other countries that have an active technology sector and thus are worth investing in, I think, also have concentration like this [in the US],” he said.
“The Korean stock market, you’ll see Hynix and Samsung; similar story in Taiwan and China. So I do think if you’re planning to invest outside of the US, active management may make some sense.”
But actually getting the capital to shift to emerging markets from developed markets will take a stronger catalyst – one of which could be the prospect of a weaker US dollar in the future, said ClearBridge’s Schulze.
“If you think the dollar is going to be structurally weaker over the next five or 10 years, you should probably look to increase your non-US allocation overall,” he said.
“The Chinese consumer could start to come back. That would be a huge tailwind to that asset class. I could go on forever.
“A lot of non-US countries have more fiscal space to support their economy and earnings. I think if you get two or three of those catalysts, you could see durable outperformance as you look forward.”
