Why change the approach to thematic investing?

  • Citrini says that when it began investing in themes in 2023, stock valuations were low and market sentiment was subdued, allowing investors to buy proven companies cheaply. Today, more growth is priced into the market, and new thematic narratives are more likely to center on speculative, unprofitable companies that depend on a market worth 2030.
  • The firm has therefore rebuilt Citrindex from the ground up: it is retaining most core themes but adjusting how they are expressed, shifting toward reversals, pair trades and entirely new ideas, and adding sectors it believes remain overlooked. The previous approach of broadly holding baskets of high-beta themes amplified gains when markets rose, but also amplified losses when they fell.

Why is AI revenue growth still insufficient to support spending expectations?

  • Citrini notes that hyperscalers' annualized capex is approaching 1 trillion dollars, and that this does not include all AI spending; the firm estimates that the AI ecosystem needs at least 200 billion dollars in annual recurring revenue. The figures differ in scope and time basis, but reflect the need for revenue growth to catch up with massive investment.
  • The firm believes that a further doubling of capex would require trillion-dollar revenue to support it, and it does not think that condition will be met. The gap could narrow through a combination of substantial revenue growth and slower capex growth; the latter would change some investment assumptions based on continued rapid expansion.
  • Growth has not disappeared: Citrini still expects Token usage, spending and AI adoption to continue rising, and also believes OpenAI and Anthropic may have long-term value. However, the report says leading labs have slowed their spending commitments, while quarterly growth in remaining performance obligations (RPO) has fallen to a multiyear low.
  • Price competition also affects revenue realization. The report says that after OpenAI made steep price cuts on 30 July, it recaptured some market share, indicating that some customers are price-sensitive; meanwhile, Citrini has observed that Token prices have temporarily stabilized and that Anthropic's products are performing well.

How do financing and construction bottlenecks affect the pace of investment?

  • Citrini says hyperscalers can no longer finance projects solely from their own cash flow and need to issue debt and equity; it has observed that demand in capital markets for these issuances is beginning to weaken. The availability of financing is therefore an important condition for maintaining the pace of construction.
  • Interconnection infrastructure, labor and material supplies are slowing data-center construction. If delays accumulate and costs rise, projects may be completed closer to their debt maturities, increasing financing pressure.
  • The report cites an example of an Anthropic-backed data-center project stalled by a suspension order in Texas, with 15 billion dollars in disbursed bridge loans held by banks caught up in the situation. Citrini also believes requirements concerning permitting, clean energy and protections for electricity customers could raise construction costs.

Why might the economy continue expanding as AI expectations cool?

  • Citrini has observed that overall job openings rose for the first time in four years, while employment in cyclical manufacturing rebounded; headline readings in services and manufacturing surveys also reached multiyear highs. In addition to AI investment, the firm believes tax cuts, tariff relief and the localization of production are also supporting the economy.
  • Total employment appears weak, but labor supply is also slowing. The report cites Federal Reserve Board data showing that the monthly breakeven level of job creation needed to absorb labor supply fell from 155 thousand people in 2023–2024 to 50 million to 10 thousand people by the end of 2026; the report also lists average nonfarm payroll growth of 51 thousand people over the most recent three months.
  • The economic expansion and asset-price signals do not align: of the 14 asset groups Citrini tracks, 9 show a stagflationary bias, while cyclical stocks have fallen 6.9% relative to defensive stocks over the past six months. But the rotation into defensives has lasted for several months, and valuations for some consumer-staples stocks are high, so the firm is also reluctant to chase that trade blindly.