This earnings season, S&P 500 companies are reporting solid profit growth, and much of the credit goes to the artificial intelligence boom. But one strategist is urging caution: the AI data center buildout that's driving those numbers may be partly fueled by a circular financing loop, not just genuine customer demand. If that spending spree cools, corporate profits could snap back toward their long-term trend.
The worry: a financial loop, not just real demand
The strategist's concern centers on how some of the AI infrastructure is being paid for. In a circular financing arrangement, money flows from one part of the financial system to another in a way that can inflate apparent demand. For example, a tech company might borrow to build data centers, and those same data centers might be used by other firms that are themselves funded by the same lenders or investors. This can create a self-reinforcing cycle that looks like robust customer demand but is actually just money moving in circles.
When demand is genuine, companies earn revenue from real customers who pay for services. But if a significant chunk of the spending is financed by the same entities that are supposed to be the customers, the underlying economics are shakier. If that financing dries up or the cycle breaks, the spending could slow sharply, and the profits that depended on it would follow.
Why this matters for S&P 500 earnings
Corporate earnings are the single biggest driver of stock prices over the long run. When S&P 500 profits are strong, investors tend to bid up stocks. But if those profits are partly an illusion—supported by a financial loop rather than real economic activity—then the market could be in for a rude awakening.
The strategist argues that if the AI spending spree slows, S&P 500 profits could revert to their historical trend. That would mean the recent earnings beat might not be as durable as it looks. For everyday investors, this is a reminder that not all earnings growth is created equal. A company can report record profits, but if those profits are tied to a fragile financing structure, they may not last.
What to watch next
Investors should keep an eye on how much of the AI data center spending is backed by real customer contracts versus internal or related-party deals. They should also watch for any signs of tightening credit conditions, which could make it harder for companies to finance new projects. If major tech firms start pulling back on capital expenditure guidance, that could be an early warning sign.
It's also worth noting that the AI boom has been a key driver of the broader market's gains. SpaceX's first earnings report highlighted Starlink's strength and its own AI spending, showing how intertwined the AI narrative has become with corporate results. Similarly, CoreWeave's expansion into Indonesia underscores the global race to build AI infrastructure. These moves are exciting, but they also add to the overall spending pile.
On the other hand, not all earnings news is about AI. Honda lifted its profit outlook thanks to a weaker yen, and Synthomer raised its outlook on cost cuts. These show that traditional factors like currency moves and efficiency still matter. But the AI data center story is the one that could have the biggest impact on the overall index.
What it means for your portfolio
For the average investor, this is not a signal to panic or sell everything. Rather, it's a reason to understand what's driving the stocks you own. If a company's profits are heavily dependent on AI infrastructure spending, it's worth asking how durable that demand really is. Diversification across sectors can help cushion the blow if the AI trade unwinds.
It's also a reminder that earnings season is not just about whether companies beat estimates—it's about the quality of those beats. A beat driven by one-time gains or circular financing is less valuable than one driven by real customer demand. As the strategist suggests, the market may be pricing in a level of AI-driven profit growth that could prove unsustainable.
In the coming quarters, watch for any cracks in the AI financing structure. If companies start to report weaker guidance or if lenders tighten the purse strings, that could be the first sign of a slowdown. Until then, the earnings picture looks bright, but it's worth keeping one eye on the foundation.
