AI Investment Swells, Traditional Hardware Growth Slows

Enterprise technology budgets are increasingly tilted towards AI, with artificial intelligence infrastructure and software commanding the lion's share of growth while traditional hardware investment shows signs of stagnation. IDC projects global AI spending will surge to over US $632 billion by 2028, propelled by an almost 30 percent compound annual growth rate between 2024 and 2028. Generative AI alone is expected to capture roughly one‐third of this, driven by a stunning five‐year CAGR of approximately 59 percent.

Spending on AI‐related software-including platforms, applications and system infrastructure-already represents over half of AI expenditure, while hardware and services each account for around 24 percent. Yet, among technology categories, AI infrastructure remains a significant and fast‐growing segment, set to account for over US $200 billion by 2028.

Cloud service providers and hyperscalers are leading the charge. In the first half of 2024, global spending on AI infrastructure reached nearly US $47.4 billion, driven by a 105 percent surge in server investments, which comprised 95 percent of the infrastructure market. Storage hardware grew by a more modest 18 percent. The soaring demand-particularly for accelerated servers-has pushed AI infrastructure spending forecasts well beyond US $200 billion annually by 2028.

Despite this rapid ramp-up, there are signs of restraint in legacy IT expenditure. Gartner's forecasts place total global IT spending beyond US $5.43 trillion in 2025, but growth is relatively modest-around 7.9 percent year‐on‐year-and being driven mostly by AI‐optimised data centre systems, which are outpacing traditional servers. Other categories such as devices, IT services and communication services are advancing more slowly.

Major tech players continue to plough capital into AI infrastructure. In Q1 2025 alone, U. S. hyperscalers-including Alphabet, Microsoft, Meta and Amazon-invested approximately US $81 billion, with a projection that full‐year spending could exceed US $300 billion. While Wall Street analysts caution about overinvestment against uncertain returns, spending remains robust, even amid economic headwinds.

A recent J. P. Morgan survey of CIOs managing US $123 billion in annual enterprise tech budgets found that AI hardware comprises just 6 percent now but is expected to grow to 16 percent within three years. Microsoft and Nvidia are singled out as significant beneficiaries of this shift, as enterprises increasingly prefer buying AI agents and services rather than building solutions in‐house.

McKinsey's research adds nuance, noting that while high‐performing IT organisations can deliver up to 35 percent greater revenue growth and 10 percent higher profit margins than their peers, there remains a productivity gap. The shift to consumption‐based, as‐a‐service models-most of IT expenditure is now operational rather than capital-has altered the economics of enterprise tech. Yet only a small fraction of AI pilots scale to deliver value, with many failing to transition beyond experimentation.

The broader economic impact of AI infrastructure investment remains under scrutiny. While analysts, including those at Reuters, foresee AI capex surpassing US $200 billion in 2025 and shifting the investment landscape in favour of capital‐intensive hardware, concerns about hardware's cyclicality and macroeconomic sensitivity persist. Analysts caution that oversupply or underwhelming returns could lead to instability similar to past tech cycles.

With these dynamics at play, enterprise and investor focus is turning towards efficiency and ROI. The adoption of FinOps to manage cloud and AI spend reflects a growing need for transparency and cost accountability. CIOs are under pressure to align investments with value creation, while also navigating the evolving economics of subscription-based software, hardware amortisation and AI deployment costs.

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