Markets analyst Jim Paulsen warns AI-capex boom faces threat from two directions: saturation and macro weakness.

Capital spending has buoyed the AI trade for months as companies continue to pledge tens of billions of dollars towards it. However, Jim Paulsen, former chief investment strategist at the Leuthold Group and current Substack scribe, sees two market trends signaling bumps in the road ahead.

The first indicator is the recent underperformance of AI stocks, which he says is a warning sign that investors are already bracing for weaker spending growth. The second, highlighted by the red line in the accompanying chart, is a sharp recent decline in US core capital goods orders. With oil prices, bond yields, and the US dollar surging, Paulsen says investors have already been pricing in a core capital spending slowdown.

"Should US core capital spending decline in the coming six months or even simply trend sideways, this would force a major readjustment in the mindsets of many investors who have embraced the AI spending story," he added.

AI capex has been top of mind for Wall Street analysts recently as second-quarter earnings reports have rolled in, revealing that many big tech leaders plan to keep ramping up spending. Yet the market’s reaction—sending shares of Alphabet, Tesla, and Meta into post-earnings plunges—makes it clear that investors want to see a return on these already massive investments.