The AI boom is turning traditional economics on its head as tech giants boost spending despite high interest rates

• Mega-cap tech giants have continued their record capex spending on AI despite high interest rates.
• Typically, higher rates slow capex spending, but the AI opportunities seem to be too enticing.
• "This is another reason why the monetary policy transmission mechanism is much weaker than usual," Apollo's Torsten Sløk said.

The ongoing boom in artificial intelligence has flipped traditional economic principles on its head.

That's according to Apollo chief economist Torsten Sløk, who highlighted in a Wednesday note the continued surge in capex spending by mega-cap tech giants despite high interest rates.

"Despite the Fed funds rate being at the highest level in decades, capex spending by the Magnificent Seven is at record-high levels," Sløk said.

Typically, when interest rates rise, as they did aggressively beginning in 2022, capital expenditure spending slows down due to the rising cost of capital and the expected slowdown in aggregate demand.

But this time, the mega-cap tech giants see the potential opportunity in AI as too good to pass up and are spending heavily on it, which has blunted the impact of the Fed's monetary policy.

"This is another reason why the monetary policy transmission mechanism is much weaker than usual. Fed hikes are having a much smaller negative impact than normal on business investment decisions because of the strong appetite among firms to invest in AI," Sløk said.

And the capex boom is showing no signs of slowing down, according to a recent note from Morgan Stanley's director of research Katy Huberty.

Huberty said Amazon, Alphabet, Meta Platforms, and Microsoft are on track to generate $176 billion in operating cash flow in 2025, giving them plenty of cash to spend on more AI-enabled GPU chips.

"Hyperscalers' pockets are still deep enough for further spending," Huberty said, adding that the average AI capex / EBITDA ratio is about 40%.

Those growing profit trends should continue to fuel the AI capex boom and "dispel concern and drive share-price rebounds for the overall AI supply chain," Huberty said.

Now the question is whether imminent rate cuts from the Fed will add even more fuel to the fire of the ongoing AI capex boom.