by Dr. Chris Kacher
The Facts
- **Circular revenue** seen among AI companies is real and does hurt earnings quality in the short term (Microsoft paying OpenAI, OpenAI paying Microsoft Azure, Amazon investing in Anthropic then getting the cloud spend back, etc.).
- However, **AI capability is improving exponentially** — this is the part that creates the “jaw-dropping” reactions from Elon Musk, Marc Andreessen, and others.
- Because of this exponential progress, the massive capex (hundreds of billions) can still be justified as a **necessary investment** in the future infrastructure of intelligence.
- Bottlenecks (energy, chips, data centers, ROI realization, regulation) are being actively attacked, but any delay or slowdown could create a **speed bump** → leading to a meaningful correction in Nasdaq and S&P 500.
- Progress in reasoning, coding, multimodal models, and agentic systems really is moving extremely fast — faster than almost anyone expected even 18 months ago.
- Elon and Andreessen repeatedly say the rate of improvement feels almost “magical” or “scary” in private conversations and public appearances.
- If the exponential curve continues, the current circular spending phase could be the equivalent of “paying to build the railroads” — painful in the moment but transformative once the infrastructure is in place.
- High capex today is the price of securing the future moat.
Realistic Risks
- Circular revenue **is** inflating current reported numbers. A significant portion of Big Tech cloud growth is still money moving in a closed loop.
- The “prove-it” moment is approaching. Companies are now demanding clear ROI on AI spend, and many are hitting budget walls.
- Bottlenecks are real: power availability, transformer chips, data quality, and energy costs remain serious constraints that cannot be solved instantly.
- History shows that even revolutionary technologies (railroads, internet, smartphones) go through painful digestion periods and corrections.
The exponential progress in AI capability **does** justify a lot of the current capex and valuations **in the long run**.
However, the path is not smooth. A **speed bump** (delayed ROI, energy crunch, regulatory pushback, or simply slower-than-expected monetization) remains a very plausible trigger for a **10–25%+ correction** in Nasdaq and S&P 500 at some point in the next 12–24 months.