By Naomi Rovnick and Lewis Krauskopf

LONDON/NEW YORK, Jan 5 (Reuters) - Global stock markets, riding high on AI euphoria at the start of 2026 may be disregarding one of the biggest threats that could spoil the party: a surge in inflation driven partly by the tech investment boom.

U.S. stock indexes, where seven tech groups contributed half of all market earnings this year, made double-digit gains in 2025 to hit record highs as exuberance about AI and monetary easing also propelled European and Asian equities to record peaks.

Expectations for further rate cuts have buoyed bonds too, handing U.S. Treasury investors the best annual performance for five years as inflation retreated, although it remains above the Federal Reserve's average 2% target. 

For 2026, waves of government stimulus in the U.S., Europe and Japan as well as the AI boom are expected to refuel global growth.

This has money managers bracing for inflation to re-accelerate, prompting central banks to end their rate-cutting cycles, slamming the brakes on the easy money flow into AI-obsessed 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. He said that while he was holding on to big tech stocks for now he would not be surprised to see inflation booming worldwide by the end of 2026. 

Tighter money would reduce investors' appetite for speculative tech, raise funding costs for AI projects and reduce tech groups' profits and share prices, Greetham said.

The multi-trillion-dollar race by so-called hyperscalers like Microsoft, Meta and Alphabet to build new data centres was also an inflationary force, analysts said, because of the rate at which these projects are gobbling up energy and advanced chips.

"The costs are going up not down in our forecast, because there's inflation in chip costs and inflation in power costs," Morgan Stanley strategist Andrew Sheets said.

He said U.S. consumer price inflation would stay above the Federal Reserve's 2% target until the end of 2027 in part because of heavy corporate investment in AI.

J.P. Morgan head of cross-asset strategy Fabio Bassi said that an improving U.S. labour market, stimulus spending and rate cuts that have already happened would keep inflation above that target "regardless of the price of chips."

Aviva Investors said in its 2026 outlook that a key market risk would come from central banks ending their rate-cutting cycles or even starting to hike, as price pressures build up from AI investment and waves of government stimulus spending in Europe and Japan.

CHIPS AND CHARGES

"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 $683 billion of assets directly and advises institutions running a combined $16.2 trillion. 

He is not yet betting on a stock market correction, but is edging out of debt markets that might get rattled by an inflation shock. 

Markets have already shown early signs of nerves about rising costs and potential AI over-spending.

Oracle's shares plunged last month as it revealed spending had soared, while U.S. tech stablemate Broadcom's stock also dropped after it warned its high profit margins would get squeezed.

Personal computer maker HP Inc expects to feel pressure on prices and profits in the later part of 2026 from the surge in memory chip costs driven by rising data centre demand.

"Inflation is what could start to scare investors and cause markets to show some cracks," said asset manager Carmignac investment committee member and portfolio manager Kevin Thozet. 

With the economic growth cycle accelerating "inflation risk remains very underappreciated," he said, prompting him to stock up on inflation-protected Treasuries. As rate hike risks increased, he said, the price-earnings valuations investors applied to large AI stocks would fall.

ANALYSTS SEE AI COST BLOWOUT

Deutsche Bank expects AI data-centre capital expenditure to reach as much as $4 trillion by 2030 and the rapid rollout of these projects could cause supply bottlenecks in chips and electricity that make investment costs spiral, the bank's analysts said. 

George Chen, partner at consultancy Asia Group, who also formerly held a senior role at Meta, said that cost blowouts and consumer price inflation would raise the costs of AI projects and prompt a rethink among investors about chasing the AI theme. 

"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. 

(Writing by Naomi Rovnick. Reporting by Naomi Rovnick in London, Brenda Goh in Shanghai and Lewis Krauskopf in New York. Additional reporting by Karin Strohecker and Vidya Ranganathan in LondonEditing by Vidya Ranganathan and Jane Merriman)