Investors shift to value stocks amid AI-driven inflation fears

Monday 05 January 2026 - 14:50

By: Dakir Madiha

Investors shift to value stocks amid AI-driven inflation fears

As global stock markets kick off 2026 buoyed by artificial intelligence fervor, a growing chorus of investors and strategists warns that surging AI-related spending could reignite inflation and derail the rally, prompting a pivot toward undervalued assets.

Fund managers express rising alarm over the multi-trillion-dollar race among tech giants Microsoft, Meta, and Alphabet to build AI data centers, which is driving up chip and energy costs and fueling inflationary pressures that markets may be downplaying. Deutsche Bank projects AI data center investment could hit 4 trillion dollars by 2030. Morgan Stanley strategist Andrew Sheets observes that "costs are rising, not falling, in our forecasts, with inflation in chip costs and energy costs."

"What keeps us up at night is that inflation risk has resurfaced," says Julius Bendikas, European head of economics and dynamic asset allocation at Mercer, which oversees 683 billion dollars in assets. Trevor Greetham, multi-asset head at Royal London Asset Management, cautions that while he still holds tech stocks for now, he "wouldn't be surprised to see inflation explode worldwide by the end of 2026."

Early warning signs have emerged in the markets. Oracle shares tumbled in December after revealing sharply higher spending, Broadcom dipped on margin pressure warnings, and HP Inc anticipates pricing and profit challenges late in 2026 due to memory chip cost spikes from data center demand.

These trends are steering investors to alternative plays. Small-cap stocks are gaining traction, with the Russell 2000 hitting record highs late in 2025; Jefferies strategist Steven DeSanctis forecasts a nearly 14 percent rise by year-end 2026. "The big change as we enter 2026 is the return of earnings growth in small-cap stocks," notes Oren Shiran, portfolio manager at Lazard Asset Management.

Diversification dynamics are at play elsewhere. J.P. Morgan Private Bank sees gold prices climbing to 5,055 dollars per ounce by end-2026 from about 4,100 dollars in 2025, fueled by central bank buying and a shift from dollar-denominated assets. Bank of America eyes 5,000 dollars this year. Healthcare and financial sector stocks draw interest too, with Morgan Stanley highlighting weight-loss drugs as a key healthcare catalyst. Emerging market equities and bonds stand to gain from a softer U.S. dollar and appealing valuations, with Morgan Stanley projecting about 8 percent returns for local-currency emerging market debt by mid-2026.

This shift acknowledges that sustained AI outlays, paired with government stimulus in the United States, Europe, and Japan, could force central banks to pause rate cuts or even hike, curbing capital flows into AI-centric markets.