The Fate of the "Capital Expenditure Bull Market" – The Rise and Fall of the Stock Market in the Canal, Railway, and Telecommunications Technology Revolutions

The wheels of history roll forward, but the script of the capital market seems to be astonishingly replayed.

Currently, the capital market frenzy ignited by artificial intelligence (AI) is pushing tech giants into an unprecedented capital expenditure race. According to a report released by Deutsche Bank on September 24, tech giants like Microsoft, Meta, Google, and Amazon are ramping up AI infrastructure investment with unprecedented intensity, which is undoubtedly a high-risk, high-reward gamble.

The bank warns that historically, capital expenditure booms driven by technological revolutions, such as the canals of the 18th century, the railroads of the 19th century, and telecommunications in 2000, ultimately evolved into "Boom-Bust" cycles, leading to the bursting of related stock bubbles and significant losses for investors.

The core point of the report is that while new technologies can permanently enhance productivity and change the world, the financial market frenzy associated with them often ends in "a mess." Understanding the ups and downs of the stock market during the canal, railroad, and telecommunications revolutions provides valuable lessons for judging the future direction of the current AI investment boom.

AI Arms Race: The Tech Giants' Billion-Dollar Gamble

According to the report, the capital expenditures of the "Big Four Tech Giants"—Microsoft, Meta, Google, and Amazon—have been steadily rising since 2015, with explosive growth recently. Specifically, their capital expenditures are expected to exceed $200 billion in 2024 and approach $400 billion in 2025.

The report predicts that this growth trend will continue at least until 2030, when the annual total capital expenditures of the four companies may surpass $500 billion.

Source: Deutsche Bank, Bloomberg Finance LP

These four tech giants are engaged in a "massive high-risk bet." The core question of this gamble is, when all the giants invest heavily, who will ultimately succeed in monetizing these investments?

The report presents a sharp viewpoint: the ultimate beneficiaries of the AI revolution may be more the users of the technology rather than its producers.

Echoes of History: The Bubbles and Bursts of Canal and Railroad Frenzy

History is the best teacher. The report reviews two famous capital expenditure bubbles in British history.

• The "Canal Mania" of the late 18th century: The report's charts show that in the 1790s, the stock price index of investments in emerging canal technologies skyrocketed in the short term, only to collapse rapidly thereafter.

• The "Railway Mania" of the 19th century: Similarly, in the 1830s to 1840s, railroads, as a disruptive technology, attracted massive capital, and their stock index experienced a more spectacular bubble and burst, with the magnitude of the collapse far exceeding that of the broader market index at the time

Source: Deutsche Bank, Bank of England, Finaeon

Deutsche Bank pointed out that the commonality between these two events is that while canals and railways did indeed permanently change the economic landscape, those investors who bought at the peak of the frenzy suffered enormous financial losses. This proves that "a financial market during a rare boom-bust cycle has almost never emerged amid a massive capital expenditure boom."

A Closer Lesson: The Warning of the 2000 Telecom Bubble

If the railroads of the 19th century seem too distant, then the telecom industry bubble of 2000 provides a more immediate warning.

The charts presented in the report clearly compare two curves: on one hand, the number of global mobile cellular network users (per 100 people) exploded from nearly zero in the 1990s to widespread adoption today.

On the other hand, the telecom sector stock price indices in the U.S. (S&P 500 Telecom Services) and Europe (STOXX 600 Telecom) peaked in 2000 and then fell sharply.

Figure: Global Mobile User Penetration vs. U.S. and European Telecom Stock Performance Source: Deutsche Bank, Bloomberg Finance LP, World Bank

The astonishing fact is that "25 years later, despite the technology being widespread and changing the world, telecom stocks have still not surpassed their peak value in 2000." This again confirms the core argument of the report: the successful promotion of technology and the returns for early investors are two completely different stories. The massive capital invested in building the information superhighway did not provide corresponding long-term returns for shareholders in the secondary market.

Can Rate Cuts Make the Bubble Fly Higher?

So, will the current AI bubble continue to expand?

The report also provides a macro perspective. Data shows that since 1957, if the Federal Reserve initiates a rate-cutting cycle without an economic recession, the S&P 500 index typically records very strong gains within two years of the first rate cut. This historical pattern adds more uncertainty to the current market. If the macro environment aligns, the investment frenzy in the AI sector may continue for a longer time, pushing the bubble to new heights, only to repeat the fate of history.

Dual Alerts of U.S. Stock Valuation and Concentration

This AI-driven bull market has pushed the market to two historical extremes First, let's talk about valuation. The report's charts show that the current CAPE ratio of U.S. stocks has risen to historical highs, second only to the peak of the dot-com bubble in 2000. Historical data ruthlessly reveals a pattern: whenever valuations reach such high points (like in 1929 and 2000), the market returns over the following decade, especially the real returns adjusted for inflation, are often negative.

S&P 500 Index CAPE Ratio and Future 10-Year Total Returns Source: Deutsche Bank

Secondly, let's consider market concentration. Another notable feature of the AI boom is the winner-takes-all phenomenon. The chart shows that the combined weight of the top five companies by market capitalization in the S&P 500 Index (NVIDIA, Microsoft, Apple, Alphabet, Amazon) has approached 30%.

This concentration is not only far higher than the levels during the dot-com bubble in 2000 but even surpasses the peak moments of the "Nifty Fifty" craze in the early 1970s. The report notes that this does not necessarily indicate a bubble, but it undoubtedly suggests that the market has entered "uncharted territory," with overall performance overly reliant on the fate of a few companies.

Historical Trends of Market Capitalization Share of the Top Five Companies in the S&P 500 Index Source: Deutsche Bank

For today's investors, this historical review is undoubtedly a wake-up call. The wave of the AI revolution is unstoppable, but has the frenzy in the capital markets detached from the fundamentals? Historical lessons remind us that while chasing the next "opportunity of the era," we must remain highly vigilant about stock price surges driven by capital expenditure, as the end of euphoria often leads to a brutal return to value.

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