How AI and Power Supply Will Shape Markets Next Year

TL;DR

AI and compute cost are central to the market outlook. The key message is that demand for data centers and faster AI-enabled analytics will drive growth, but the cost of compute and grid adequacy are risks. States that improve power delivery will be winners in the AI era.

Transcript

CELEBRATED MY 50TH YEAR IN FINANCE LAST WEEK. I WAS AT, YOU KNOW, OBVIOUSLY AT THE BEGINNING OF THE MORTGAGE BACKED SECURITIES MARKET IN THE 70S. AND 80S, I BELIEVE THE ROLE OF FINANCING INFRASTRUCTURE AROUND TECHNOLOGY, WHETHER IT'S FINANCING DATA CENTERS OR FINANCING THE PURCHASE OF CHIPS, AS I SAID EARLIER, I THINK WE'RE GOING TO HAVE MARKETS IN... Read More

Key Insights

• AI-driven demand for compute is accelerating, especially in data centers and hyperscalers, and will influence investment decisions.
• The key to sustaining margins is using technology to do more with less, including leveraging AI in trading and operations.
• Power supply and grid reliability are critical to AI growth, and faster, more affordable energy delivery will determine regional competitiveness.
• The United States must be power agnostic and scale manufacturing of solar and storage to support AI infrastructure.
• Investment in data center capacity and 1 GW scale projects signals ongoing capital expenditure and financing needs.
• Leverage in markets is not seen as a significant risk compared to 2008, but pockets of leverage exist, particularly in crypto and some ETFs.
• China is rapidly expanding nuclear and solar capacity, highlighting a competitive pressure to accelerate domestic energy production for AI growth.
• Margin expansion in BlackRock is linked to technology-driven efficiencies; sustaining this requires continued growth in private markets and retirement solutions.

Questions & Answers

Q: How will AI and compute costs affect market growth in the next year?

AI and compute costs are pivotal to the near term market outlook. The interview stresses that while demand for memory and data center capacity remains high, the cost of compute could constrain adoption if not managed. Lowering compute costs through better technology and more efficient grids could unlock wider use of AI, supporting stronger investment returns.

Q: What is the role of power supply in AI expansion?

Power supply is described as a bottleneck for AI growth. The speaker notes that insufficient and unreliable power can hinder data center expansion and AI adoption. Improving grid reliability, increasing power delivery, and domestic manufacturing of solar and battery storage are proposed as essential for sustaining AI-driven growth.

Q: Why is the US urged to be power agnostic, and what does that mean?

Being power agnostic means not prioritizing a single energy source. The discussion argues that the US should be able to source power from various technologies, including solar and hydrocarbons, as long as there is sufficient and stable supply. This flexibility is seen as crucial to maintaining AI leadership and avoiding price spikes.

Q: How does BlackRock plan to maintain or grow margins?

Margin growth is attributed to using technology to process more trades and scale operations without increasing headcount. The firm expects continued momentum in private markets and retirement sectors, combined with AI-driven analytics, to sustain higher margins while asset bases expand.

Q: What concerns are raised about smaller businesses in the AI era?

The speaker questions how small and medium businesses will compete as AI becomes more cost effective and widespread. The concern centers on access to affordable compute and dependable power, which could widen competitive gaps if larger firms can deploy AI more rapidly and cheaply.

Q: How does geopolitical competition influence AI infrastructure plans?

China is highlighted as aggressively expanding nuclear and solar capacity to support its AI revolution, creating competitive pressure for the US to accelerate its own energy and data center development. This includes boosting domestic manufacturing of energy components to support AI readiness.

Q: What is the market risk outlook regarding leverage today?

The view is that current overall leverage is not as risky as in 2008-2009, with a caveat that pockets of leverage exist in specific markets. The emphasis remains on technology-driven efficiency lifting margins rather than systemic leverage concerns.

Q: What gives BlackRock confidence for the next 12 months?

The confidence comes from the belief that technology and AI will power better corporate margins and growth, supported by continued asset growth and higher flow into tech-enabled strategies. The company notes margin gains and a strong position in tech-enabled trading and asset management.

Summary & Key Takeaways

• BlackRock sees the AI revolution as a driver of better margins and growth in areas like private markets and retirement. The view emphasizes the role of technology and data center financing in expanding asset bases and earnings.

• A critical concern is lowering the cost of compute and ensuring reliable power supply to enable widespread AI adoption and competition. The conversation compares US and China capacity and calls for more American manufacturing of solar panels and battery storage.

• The interview frames energy infrastructure and grid improvements as essential to maintaining U.S. leadership in AI and technology, with a focus on accelerating capital expenditure and power delivery to support hyperscalers and data centers.