LONDON/NEW YORK CITY: After a blistering rally powered by artificial intelligence, investors are increasingly worried that markets may be overlooking a key threat heading into 2026: inflation fueled by the very tech boom driving growth.

Global equities surged in 2025, with U.S. stock indexes hitting record highs as enthusiasm for AI and expectations of easier monetary policy lifted markets in Europe and Asia as well. In the United States, just seven technology groups generated about half of all market earnings last year. Bonds also rallied as inflation cooled, giving U.S. Treasury investors their best annual performance in five years, even though inflation remained above the Federal Reserve's two percent target.

Looking ahead, investors expect fresh waves of government stimulus in the U.S., Europe, and Japan, alongside continued AI investment, to support global growth in 2026. But money managers say those same forces could push inflation higher again, forcing central banks to halt rate cuts or even resume tightening and threatening valuations in AI-heavy markets.

"You need a pin that pricks the bubble, and it will probably come through tighter money," said Trevor Greetham, head of multi-asset at Royal London Asset Management. While he is still holding large tech stocks, he said he would not be surprised to see inflation surge globally by the end of 2026.

Tighter monetary policy would sap appetite for speculative technology stocks, raise funding costs for AI projects, and squeeze profits, Greetham added.

Analysts say the massive spending plans of hyperscalers such as Microsoft, Meta, and Alphabet are themselves inflationary. The race to build data centres is driving up demand for electricity and advanced semiconductors.

"The costs are going up, not down, in our forecast, because there's inflation in chip costs and inflation in power costs," said Andrew Sheets, a strategist at Morgan Stanley. He said U.S. consumer inflation would likely remain above the Fed's two percent target until the end of 2027, partly due to heavy corporate investment in AI.

Fabio Bassi, head of cross-asset strategy at J.P. Morgan, said an improving U.S. labour market, fiscal stimulus, and earlier rate cuts would keep inflation elevated "regardless of the price of chips."

Aviva Investors warned in its 2026 outlook that a key market risk was central banks ending their rate-cutting cycles or restarting hikes as AI investment and government spending add to price pressures.

"What keeps us awake at night is that inflation risk has resurfaced," said Julius Bendikas, European head of economics and dynamic asset allocation at Mercer, which manages US$683 billion directly and advises on $16.2 trillion. While not yet betting on a stock market correction, he said Mercer was trimming exposure to debt markets vulnerable to an inflation shock.

Markets have already shown signs of concern. Oracle shares fell sharply last month after the company disclosed a spike in spending, while Broadcom's stock dropped after warning that margins would be squeezed. HP Inc has said it expects higher memory chip costs tied to data centre demand to weigh on prices and profits later in 2026.

"Inflation is what could start to scare investors and cause markets to show some cracks," said Kevin Thozet, an investment committee member at Carmignac. With growth accelerating, he said inflation risk remains underappreciated and has prompted him to buy inflation-protected Treasuries.

Deutsche Bank estimates AI data-centre capital spending could reach $4 trillion by 2030, raising the risk of supply bottlenecks in chips and power. George Chen, a partner at consultancy Asia Group and a former Meta executive, said such cost blowouts could curb investor enthusiasm.

"Memory chip cost inflation will push up prices for AI groups, lower investors' returns, and then the flow of money into this sector will reduce," he said.