Is Data Center Demand Fading?

A Comment on U.S./China Trade Talks

Yesterday China announced across-the-board rate cuts along with other stimulative measures which could flow 2.1 trillion yuan ($291 billion) into the economy. This comes ahead of the news that Scott Bessent and Vice Premier He Lifeng will be traveling to Switzerland for meetings this weekend. It is encouraging to see the two sides willing to negotiate – if any deal is stuck or a pause on higher reciprocal tariffs is agreed on, it will bode well for markets. Additionally, we have heard of progress on trade deals with India and Japan.

Even though markets have rallied 10% from the April lows, sentiment is still cautious. We rallied because the economy is holding up and earnings are expanding 13% y/y, with guidance better than feared. We have been adding to our favorite names since February – our cash position has declined from 9% to 2%. We see strong ideas in cyclicals: financials, data center industrials, communication services, and discretionary.

Whispers Regarding Declining Data Center Demand

There have been numerous reports over the last few weeks stating that companies are cutting back on data center investment. First, a report about Microsoft (MSFT) stated that the company is “slowing/pausing” some artificial intelligence (AI) data center projects in Ohio, then a Wells Fargo report mentioned that Amazon (AMZN) is reconsidering data center investment plans.^[1] These reports were quickly refuted by company management, with AMZN’s VP of Global Data Centers stating that there has been no significant change, and that they continue to see very strong demand with investments only going up over the next couple of years.^[2]

AI, data center demand, and power generation remain long-term themes in our portfolios. Commentary from companies during first-quarter earnings season has been upbeat and position on capital expenditure (cap ex) plans and data center investments. MSFT reported beats on cloud revenues with cap ex coming in above expectations at $16.75 billion for the quarter. The company stated that it is not seeing a slowdown in data center or AI demand, mentioning that more factors go into data center investment than just demand – it is also about the shape of the workload and location of the data center. MSFT noted that they are actually limited by data center space and power and are more capacity constrained than they were last quarter given high levels of demand for their cloud offerings. Meta (META) raised their capex guidance from $60-$65 billion to $64-$72 billion to support data center and AI efforts. META is building out its own data centers; Mark Zuckerberg stated that they are doing this because they want to control their own destiny and they want everything in the supply chain to be optimized specifically for META’s infrastructure. From the side of technology companies, nobody appears to be slowing data center or AI spend in the distant future.

Chart 1: Hyperscaler Capex Expected to Grow ~40% y/y in 2025^[3]

The second and potentially more important piece of the puzzle is the data center infrastructure companies. These are the companies building the data centers, supplying the industrial controls, components, and systems needed for technology companies to store their compute. Two we follow are Eaton (ETN) and Quanta Services (PWR), both which reported solid first-quarter results.

ETN beat earnings and revenue estimates with strong margin expansion. The company reaffirmed guidance while raising organic growth guidance. ETN reported seeing higher construction starts in data center markets with its U.S. data center construction backlog now standing at nine years – up from seven years last quarter. Data center orders grew by 11% y/y, totaling a $10.1 billion backlog. Management is projecting an 18% compounded annual growth rate for data centers through 2030. 42 mega projects (infrastructure deals >$1 billion) were added in the quarter totaling $169 billion in total value, and 85% of projects have yet to be started.

PWR confirmed our belief that there is no fear of a slowdown in data center demand. PWR beat EPS, revenue, and EBITDA estimates with strong backlog growth in its electric infrastructure segment, up 24% y/y. The firm’s total backlog hit a record of $35.3 billion and its electrical infrastructure segment beat was driven by technology, power generation, and energy storage solutions demand. Additionally, the company repurchased $124 million worth of shares in the quarter; with $365 million left on their share buyback plan, it is plausible to assume that a new buyback plan is imminent. Electricity and the energy needed to power data centers will continue to be in short supply, and companies like ETN and PWR stand to benefit.

Chart 2: Electricity Consumption of Data Centers is Spiking^[4]

The need for power and data centers comes from the use and implementation of AI in the world economy. As long as these companies continue to invest in new technologies, data centers and power generation will be necessary. From what we have heard from management teams in the first quarter, the AI race is still alive.

Chart 3: Generative AI Growth is Outpacing the Internet and Personal Computer^[5]

Stephanie Link’s TV Schedule:

Sources:

^[1] Source: CNBC. As of April 27, 2025.

^[2] Source: CNBC. As of April 27, 2025.

^[3] Source: Blackstone. As of May 1, 2025.

^[4] Source: IEA. As of April 2025.

^[5] Source: IEA. As of April 2025.

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