AI spending lifted the index, but the debt worries grew

Good morning. Looking back at last week, AI was once again what carried US stocks. The S&P 500 notched its 27th record of the year and rose for a third straight week, helped by news that Nvidia and big asset managers are putting together a 500 billion dollar AI infrastructure fund.

The catch is where the money comes from. One analyst estimates that the AI data center build-out needs 2 trillion dollars of debt, and Wall Street may not be able to cover even half. Meta's free cash flow, the cash left after spending, fell 91% from a year ago. Big tech now competes with the government for the same pool of money, which tends to push long-term rates up when public debt is already heavy. The 30-year Treasury yield has climbed to 5.2%.

The rate outlook did get calmer. Inflation data came in as expected, lifting the odds that the Fed holds in September to about 70%. Still, there is a new worry: computers and phones used to get cheaper and keep inflation down, and AI demand could reverse that.

This week brings the minutes of the Fed's last meeting and data from China. Investors will be hunting the minutes for any hint of a hike next month. Stocks ran hard while spending wobbled and bonds fretted, and this week should give the first clue about whether that mismatch holds.