Expectations for further rate cuts have also boosted bonds, helping U.S. Treasury investors post their best annual performance in five years as inflation retreated, although it remains above the Federal Reserve’s 2% average target.By 2026, waves of government stimulus in the US, Europe and Japan, as well as the AI boom, are expected to fuel global growth.
This has money managers bracing for another acceleration in inflation, prompting central banks to end their rate-cutting cycles, hampering the easy flow of money into AI-obsessed markets.
“You need a pin to pierce the bubble and that will probably come from tighter money,” said Trevor Greetham, head of multi-asset at Royal London Asset Management. He said that while he’s sticking with big tech stocks for now, he wouldn’t be surprised if inflation soars globally in late 2026.
Tighter money would reduce investor interest in speculative technology, raise financing costs for AI projects and lower the profits and stock prices of tech groups, Greetham said. The multi-trillion-dollar race by so-called hyperscalers like Microsoft, Meta and Alphabet to build new data centers has also been an inflationary force, analysts said, because of the speed at which these projects are gobbling up energy and advanced chips.
“In our forecasts, costs are going up, not down, because there is inflation in chip costs and inflation in energy costs,” said Morgan Stanley strategist Andrew Sheets.
He said U.S. consumer price inflation would remain above the Federal Reserve’s 2% target through the end of 2027, partly because of heavy business investment in AI.
Fabio Bassi, head of JP Morgan’s cross-asset strategy, said an improving U.S. labor market, stimulus spending and interest rate cuts that have already taken place would keep inflation above that target “regardless of the price of chips.”
Aviva Investors said in its 2026 outlook that a key market risk would stem from central banks ending or even beginning to increase their rate cutting cycles as price pressures increase from AI investments and waves of government stimulus spending in Europe and Japan.
CHIPS AND COSTS
“What keeps us awake at night is that inflation risk has resurfaced,” said Julius Bendikas, European head of economics and dynamic asset allocation at Mercer, which directly manages $683 billion in assets and advises institutions managing $16.2 trillion.
He is not yet betting on a stock market correction, but is exiting debt markets that could be shaken by an inflation shock.
Markets have already shown the first signs of nervousness about rising costs and potential overspending in AI.
Shares of Oracle tumbled last month after it emerged that spending had soared, while shares of US tech stablemate Broadcom also fell after it warned high profit margins would come under pressure.
Personal computer maker HP Inc expects to feel pressure on prices and profits in the latter part of 2026 as memory chip costs rise due to rising data center demand.
“Inflation is what could scare investors and cause the markets to show cracks,” said Kevin Thozet, member of the investment committee of asset manager Carmignac and portfolio manager.
With the economic growth cycle accelerating, “inflation risk remains highly underappreciated,” he said, prompting him to stock up on inflation-protected government bonds. As the risk of rate hikes increases, he says, the price-to-earnings valuations investors apply to big AI stocks will fall.
ANALYSTS SEE AI COSTS RISING
Deutsche Bank expects capital spending on AI data centers to reach as much as $4 trillion by 2030 and the rapid rollout of these projects could create bottlenecks in the supply of chips and electricity, driving up investment costs, the bank’s analysts said.
George Chen, partner at consultancy Asia Group, who also previously held a senior role at Meta, said cost blowouts and consumer price inflation would increase the cost of AI projects and prompt a rethink among investors on pursuing the AI theme.
“Inflation in the cost of memory chips will drive up prices for AI groups, reduce investor returns and subsequently reduce the flow of money into this sector,” he said.
(Writing by Naomi Rovnick. Reporting by Naomi Rovnick in London, Brenda Goh in Shanghai and Lewis Krauskopf in New York. Additional reporting by Karin Strohecker and Vidya Ranganathan in London Editing by Vidya Ranganathan and Jane Merriman)
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