The first section of this Market Factors highlights the myriad shortages that threaten the AI buildout while providing investment opportunities at the same time. Section two details a newly issued geothermal power specialist to keep an eye on and the diversion recounts an example of why AI won’t take over the economy.
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AI
Power, water, labour in short supply
If I were 25 years younger I’d start training to be an electrician. Morgan Stanley strategist Vishwanath Tirupattur reported that data centre expansion will require 300,000 new electricians in the next decade for the U.S. alone. That’s only one shortage threatening the data centre buildout – energy, electrical equipment and water are also under-supplied. As a result, AI-related infrastructure growth is set to slow and this is not good news for current global equity market leadership.
Providing power to new data centres has become a huge headache. The time between orders for electrical equipment like transformers and generators and delivery is currently more than 125 weeks. Astoundingly, the existing and planned electrical power generation waiting to connect to the U.S. power grid is two times the size of the existing U.S. power supply.
Water for cooling data centres is also emerging as both a political (people don’t like threats to their running water supply) and practical hurdle. Mr. Tirupattur cited S&P research estimating that 43 per cent of the word’s existing data centres are in areas of high water stress.
Supply shortages almost always create investment opportunities. Electrical power equipment, particularly the equipment needed to transmit 800 volt DC power that data centres are requiring, will benefit revenues for Eaton Corp. (ETN-N), Vertiv Holdings (VRT-N), Schneider Electric and ABB Ltd.
Any kind of local power generation – natural gas, hydrogen, solar, wind, hydroelectric (probably not coal) - will be potentially attractive to investors as hyperscalers scramble to light up data centres not connected to the grid. It’s not mentioned in the Morgan Stanley report but I suspect the water treatment equipment used in desert areas like Palm Springs to convert grey water (from showers and kitchen sinks, for example) to use for thirsty golf courses might also be of interest.
Mr. Tirupattur’s report implies that delays in AI infrastructure expansion, and thus the proliferation of AI in general, are almost inevitable. To the extent that this also delays hyperscaler monetization of the billions upon billions in AI-related capital expenditure they’ve spent, it is negative for the tech sector and the performance of the equity benchmarks they dominate.
A stock to watch
Fracking for renewable power
BofA Securities continues to ramp up its coverage of geothermal power generators by initiating coverage of Fervo Energy Company (FRVO-Q) after its initial public offering last month. Analyst Ross Fowler started coverage with a “neutral” rating because the stock is somewhat a victim of its own success. The stock is trading over US$35 after coming to market 23 per cent lower at US$27. Mr. Fowler’s 12-month price target is U$40.
Fervo implements an Enhanced Geothermal System (EGS) process, which uses fracking technology to build reservoirs of heat more than a kilometer below the surface. Water is pumped below and heated, driving a steam turbine.
The company already has a working project generating three megawatts of power and a larger-scale plant expected to generate 500-MW is under construction. The company has already signed contracts equaling US$7.2-billion in revenue over the next 15 years.
The company has 40 patents representing technology and processes that have allowed substantial declines in costs. They have leased 600,000 acres of promising territory at US$4 per acre when recent auctions have seen competitors pay US$300 or more.
Fervo hopes to have 3.65 gigawatts of power capacity by 2032. There is execution risk, according to Mr. Fowler - a lot of underground construction is involved. But this is a company to keep an eye on.
A doorman stands in front of Grand Hotel Wien in ViennaHEINZ-PETER BADER/Reuters
Diversions
Doorman Fallacy
Prominent U.K. advertising executive and author Rory Sutherland uses the humble hotel doorman as an example of misguided application of technology and why AI will be less intrusive to the labour market than many fear.
Mr. Sutherland originally introduced what he calls the Doorman Fallacy concept in his book “Alchemy: The Surprising Power of Ideas That Don’t Make Sense”. The description of the concept begins with the idea that from a technology-driven perspective, doormen are economically inefficient and easily replaced.
An automatic door opening engine and a speaker spouting a canned “Welcome to the Hotel Continental” can replicate some tasks of the doorman and save the hotel $40,000 per year or so in annual salary. The business consultant recommending this path can then walk away convinced they’ve done a great job.
But taxis aren’t hailed, guests feel less warmly towards automated voices, and garbage piles up at the entrance. Guests go elsewhere with more of a human touch.
People don’t like dealing with machines. Automated customer service on the telephone has proven this for decades. Some automation will happen as AI develops but the extent to which customers’ concerns reach real people, and obviously so, will become a competitive advantage and limit the AI takeover of the labour market.
The essentials
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Globe Investor highlights
Ian McGugan points out that as SpaceX and other mega-cap IPOs launch, a major market support is falling away.
Anthony Scilipoti - the founding partner of Veritas Investment Research - thinks that the SpaceX IPO will mark a market top
Tim Kiladze reports that some buyers in Canada have already been burned as IPOs roar back
Norman Rothery updates his Stable Dividend portfolio
Extreme weather is coming. David Berman points to a stock that can sail through it
Quick hits
BMO senior economist Robert Kavcic turned his attention to the domestic birthrate, as net births – the number of babies minus deaths - is set to turn negative for the first time in 2028. All things equal, this slows growth in both the labour force and the economy, gives AI a big role in improving productivity, changes future demand for housing, and creates stress on government pension spending.
Scotiabank analyst Orest Wowkodaw forecasts an extended period of deficit conditions in the copper market – driven by electrification and slow supply growth - that will support higher commodity prices. Global demand growth was 3.6 per cent and 3.7 per cent in 2024 and 2025, respectively, and any growth at 2.0 per cent or better this year will force markets into deficit. The analyst has increased his 2026-2029 price forecasts by 10 per cent on average to US$5.95, US$6.00, US$5.75, and US$6.00 per pound. Near term he notes “market conditions are ripe for a potential near-term upside price squeeze towards $7.00/lb.”
Citi strategist Dirk Willer successfully predicted the volatility of recent weeks and on Friday provided some ideas as to how to get back in the market. He believes the selling was caused by large scale de-risking of portfolios that included AI stocks. The strong global equity rally from the March 30 lows left institutional portfolios with higher risks (in terms of beta, tracking error and standard deviation among other measures) and managers were pruning their winners and buying lower-risk stocks or increasing cash. Mr. Willer likes the Euro Stoxx 50 Index as a way to play a bounceback in markets. European stocks will be most leveraged to falling energy prices.
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