Bridgehampton Group – 3rd quarter memo

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Q3 2025 Highlights:

• The AI Trade took back the market narrative from the Trade Wars
  
  • Global market gains were powered by stocks tied to AI spending
  • The tech-oriented Nasdaq index rallied nearly 50% from its early April low
• Lower interest rates & energy costs
  
  • Borrowing costs declined as the Federal Reserve reduced interest rates to 4% from 5.25% in June 2024
  • Prices of oil, natural gas and gasoline remain subdued - mitigating the inflationary impact of tariffs

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The Boom in AI Infrastructure

Investment in artificial-intelligence (AI) infrastructure is increasingly at the core of economic growth. Fast-rising demand for AI applications feeds a massive data center and “compute” (computational power) buildout in the US. Though data centers and much of the equipment required to run AI applications are not new, the scale of current spending is many times larger than levels of only a few years ago.

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Compute demand, in turn, drives spending on electricity, materials and buildings, as well as on labor. New data-center construction sites are typically on a greater scale than other project types.

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The scale of growth in AI capacity is impressive, and it continues to be supported by demand. The largest data center operators, including Microsoft, Amazon, Meta and Alphabet, point to tight capacity as justification for increased spending. Despite the allure of perpetual growth, we should consider the real risk that spending creates excess capacity. We should also be mindful of the potential for technology itself to change the economics of the AI landscape.

AI market leaders get creative

The press is full of “bubble” talk around datacenter and AI-related stocks. Commentators find easy parallels between today’s market and the “DotCom” bubble of 1999-2000. Historically, most financial manias were grounded in credible emergent technologies that ultimately ended up having a major, or even transformative, impact on society after the construction boom. AI clearly falls into the category of credible, and almost certainly transformative, as anyone who has used a large-language model (LLM), such as ChatGPT, in the last six months can attest. AI has already begun to broadly impact societies and economies. The transformation may still be in its early stages, although we do not know to what extent and over what time frame this transformation will occur. Nor does anyone know exactly how much investment needs to be made and over what time frame.

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The current AI investment debate compels us to ask the same questions about AI infrastructure that we would ask about any investment: will we earn an acceptable return for the risks that we take? We were struck by Nvidia’s announcement last month that it would swap up to $100 billion worth of NVDA chips (at an unknown price) for up to $100 billion worth of OpenAI stock (at an unknown though estimated $300+ billion valuation). Nvidia will, in effect, finance their own chips for OpenAI as new data center capacity comes online. In exchange, Nvidia will receive “revenue” on these sales and highly uncertain future returns through a stake in OpenAI. This is more than simply vendor financing, and we agree with the characterization of this deal as “circular.” In essence, cash is moving from Nvidia, to OpenAI, then back to Nvidia. While this deal appears the most creative of the bunch, it is just one of many that OpenAI has struck in recent months for compute infrastructure, including deals with AMD, Broadcom, and Oracle.

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By making money more abundant, for a time, at least, the creative financing arrangements which arise in such periods as the present help to prolong rises in asset values. In past market cycles, including the cycle we experienced in 1999-2000, creative deals spurred an overly optimistic narrative and kept financing spigots open. Excitement over emergent technology eroded discipline with respect to returns to capital.

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For now, there seems to be almost immediate demand for any new datacenter capacity that comes online. Perhaps this demand will persist. Still, the Nvidia-OpenAI deal is among the largest and most creative funding arrangements which we have seen. Investors should be aware of potentially skewed incentives being created by this deal, which may erode capital allocation discipline. The risk of an “AI bubble” should be closely monitored.

A favorable context for growth

The surge in data-center construction and related spending occurs within a broadly favorable policy and funding environment. The OBBBA, passed by Congress in July, provides major tax incentives to break ground on new projects. A new emphasis on deregulation should accelerate permitting and approvals. Central banks are accommodative. The Trump administration seems to care about stock market performance; and, private capital to support growth is abundant, in large part thanks to increased asset values. Indeed, the same wealth-effect sustains growth in consumer spending. Bank balance sheets remain robust and capable of supporting a growing economy. Recent high-profile bankruptcies (including auto-parts supplier, First Brands) should be absorbed without calamity. By the same token, they serve to remind us of lending risks involved in complex financing arrangements.

Portfolio decisions

The eventual winners of each infrastructure boom were not necessarily the market leaders of that era. While attention locks on the AI theme, we note that not all stocks have performed well in 2025 – even as many of these companies have increased earnings well ahead of inflation and GDP growth. Many companies in the consumer goods, industrial and other sectors fit this description. Accordingly, we would not be surprised to discover market leaders in three or five years’ time who were laggards in 2025. We are careful to consider not only how these businesses are valued given what we know today, but also how they are positioned given a range of non-consensus outcomes. To invest successfully overlong periods of time, we must tolerate uncertainty bounded by a strong analytical framework.

We are grateful for the confidence you have placed in our abilities. We welcome your observations and questions, as always.

Sincerely,

Bridgehampton Group

Ingalls & Snyder, LLC, is an investment advisor registered with the U.S. Securities & Exchange Commission and a FINRA member broker dealer. This material is being provided to you for informational purposes only and is not intended to be a general guide to investing, or as a source of any specific investment recommendation and makes no implied or express recommendation concerning the manner in which any account should be handled. Any investment program involves certain risks, including loss of principal, and no assurance can be given that any specific investment objective will be achieved.

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