Reality Check: When the ground starts shaking, smart investors look down, NOT around…

From the desk of Miles Everson:

Hi!

Welcome to today’s edition of  “The Independent Investor!”

Every Wednesday, I write and publish investing-related articles with hopes to help you achieve financial freedom in the long run.

In this article, let’s discuss an important coaching comment by my friend and colleague, Professor Joel Litman, about the status of one sector in the U.S. Are you ready?

Read on below to know more.

Reality Check: When the ground starts shaking, smart investors look down, NOT around…

Every so often, the economy sends out a low, almost imperceptible rumble.

It doesn’t come from earnings headlines or breaking macro data, nor show up clearly in jobs reports or consumer sentiment surveys.

However, for those who know how to listen, it signals something far more powerful:  The early stages of a structural transformation .

Markets tend to miss these moments—not because they aren’t important, but because they unfold quietly, beneath the surface, long before they dominate headlines.

By the time consensus catches on, much of the value creation has already occurred.

According to  Professor Joel Litman , Chairman and CEO of  Valens Research  and Chief Investment Officer of  Altimetry Financial Research, the U.S. economy is in the middle of one of those moments right now.

… and investors focused solely on short-term volatility or consumer-driven indicators may be overlooking one of the most consequential capital investment cycles in modern history.

A Capital Spending Surge Unlike Anything in Generations

Professor Litman points to a striking statistic that reframes today’s market narrative:  Investment in AI data centers has already reached 1.2% of U.S. GDP.

That level of capital intensity hasn’t been seen since the railroad expansion of the 1880s, one of the most transformative infrastructure build-outs in American economic history.

This is not incremental spending; it is  foundational.

Leading the charge are the largest technology companies in the world.

Microsoft,  Meta Platforms,  Alphabet, and  Amazon —the core of the so-called “Magnificent Seven”—collectively invested more than USD 350 billion in AI infrastructure in 2025 alone, with projections exceeding USD 600 billion by 2026.

For Professor Litman, this scale matters. Infrastructure cycles of this magnitude don’t behave like short-term corporate initiatives. They reshape economic growth patterns, redirect capital flows, and create durable demand across entire ecosystems.

… but despite the scale of this investment wave, investor sentiment has been anything but calm.

A U.S. jobs report released in mid-2025 featuring downward revisions of over 250,000 jobs triggered a sharp market reaction, with the S&P 500 falling nearly 2%.

Professor Litman argues this response reflects short-term thinking applied to a long-term phenomenon.

Employment data, while important, is not the primary driver of the current growth engine. The market’s focus on consumer strength and labor trends risks obscuring what is actually powering earnings expansion:  capital expenditures on information processing, computing infrastructure, and AI-driven software .

Consumer spending is contributing less to GDP growth than in prior years, but it’s being replaced—almost seamlessly—by investment in productive capacity.

That substitution is rare in modern economic cycles, and it changes how investors should interpret traditional macro signals.

Skepticism around AI investment once centered on the fear of excessive cash burn. Massive upfront costs, uncertain monetization timelines, and unclear return profiles made investors uneasy.

Microsoft recently became only the second company in history to reach a USD 4 trillion market capitalization, reflecting confidence that its AI investments are translating into durable competitive advantages.

Meta saw its shares jump 11%, driven by improved advertising pricing powered by AI-enhanced targeting and optimization.

These results marked a clear inflection point. Wall Street’s view shifted from seeing AI as a speculative expense to recognizing it as a catalyst for sustainable growth.

From Professor Litman’s perspective, this validation is crucial. It confirms that capital spending is not just expanding capacity but also enhancing profitability.

Lessons from the Railroad Era

To understand the longevity of today’s investment cycle, Professor Litman draws a historical parallel that many investors overlook.

At its peak, railroad investment reached 6% of U.S. GDP and unfolded over several decades. While the era experienced periodic bubbles and corrections, the broader trend reshaped commerce, logistics, and industrial productivity for generations.

AI infrastructure spending has already surpassed the peak of the 5G telecom investment wave of 2020, which topped out at roughly 1% of GDP.

Yet, relative to the railroad boom, AI still appears to be in its early stages.

This comparison reframes expectations. Infrastructure cycles aren’t measured in quarters—they’re measured in decades… and the implications extend far beyond the companies writing the checks.

Why This Cycle Has Unusual Staying Power

One of the defining characteristics of the AI build-out is its built-in momentum.

Large-scale data center projects are not impulse decisions. They require years of planning, regulatory approvals, land acquisition, power agreements, and supplier contracts. Once construction begins, these projects are rarely abandoned.

Capital is already committed. Equipment suppliers are engaged. Energy contracts are locked in. Clients are counting on future capacity.

This creates a level of economic resilience that’s uncommon in today’s environment. Even if broader growth slows, the AI infrastructure pipeline continues moving forward, providing steady demand across multiple industries.

The most obvious winners of this spending wave are cloud providers and semiconductor manufacturers. However, Litman emphasizes that the ripple effects extend much further.

Construction firms, electrical equipment suppliers, power generation companies, industrial manufacturers, and specialized engineering services are all seeing increased demand.

Entire segments of the economy are benefiting from a surge in long-duration, capital-intensive projects.

This breadth matters for investors. It means earnings support is coming from multiple directions, not just consumer-facing businesses or headline tech names.

The Opportunity Beneath the Noise

Markets often struggle during transitions—not because the fundamentals are weak, but because the old frameworks no longer apply.

Investors anchored to consumer trends, short-term labor data, or near-term sentiment may miss what’s unfolding beneath their feet.

According to Professor Litman, the real story of this market cycle isn’t fear, fragility, or fading growth.

Rather, it’s a once-in-a-generation infrastructure expansion that is quietly reshaping the economic foundation of America.

… and for those willing to look beyond the headlines, the opportunity may be less about timing the next quarter.

Instead, it may be more about understanding the next decade.

Hope you’ve found this week’s insights interesting and helpful.

Stay tuned for next Wednesday’s The Independent Investor!

Artificial intelligence (AI) has had a chokehold on Wall Street in recent years. Despite this, it can't beat human judgment.

Learn more about  why AI still isn’t ready to manage people’s portfolio  in next week’s article!