Editor's note: S&P Global Ratings believes there is a high degree of unpredictability around policy implementation by the U.S. administration and possible responses--specifically with regard to tariffs--and the potential effect on economies, supply chains, and credit conditions around the world. As a result, our baseline forecasts carry a significant amount of uncertainty. As situations evolve, we will gauge the macro and credit materiality of potential and actual policy shifts and reassess our guidance accordingly (see our research here: spglobal.com/ratings).
Key Takeaways
- We expect global IT spending growth to reach 9% in 2025, driven by strong AI and cloud investments, despite economic uncertainties and trade risks.
- Hyperscalers continue aggressive AI infrastructure investments. Alphabet, Meta, Microsoft, and Amazon are significantly increasing capital expenditure despite emerging AI efficiency gains.
- The semiconductor industry is sharply divided, with AI-driven demand surging while traditional markets such as PCs, automotive, and industrial segments face headwinds.
- The memory market braces for a temporary slowdown in early 2025, but we expect a strong second half fueled by AI adoption and Windows 10 end-of-life transitions.
- Strong AI investments and solid enterprise spending support a positive bias in rating actions since the beginning of the fourth quarter, with some weakness in the 'B' category and below due to high interest rates, consistent with our forecast for 2025.
Global IT spending is poised for accelerated growth in 2025 to 9% as enterprises continue investing in AI and cloud infrastructure. While hyperscalers ramp up AI-driven capital expenditure (capex), broader enterprise AI adoption remains cautious, with concerns over return on investment, security, and compliance.
The semiconductor industry faces a stark divide: AI demand is surging while traditional markets struggle with inventory corrections and price pressures. Meanwhile, memory manufacturers anticipate a short-term downturn before rebounding later in the year, supported by AI advancements and PC upgrade cycles.
Thus, our ratings on U.S. tech companies are trending positively, especially those rated in the 'BB' category and above. A mix of robust AI spending and idiosyncratic competitive factors drove are key factors.
IT Spending Will Jump In An Increasingly Dynamic Landscape
We expect global IT spending growth to accelerate to 9% in 2025, up from 8.3% in 2024, driven by continued strong investment in AI infrastructure and cloud services, coupled with a recovery in non-AI spending. This comes despite ongoing economic uncertainties, accelerating AI product roadmaps, and new trade policy risks.
Hyperscale cloud providers continue to make substantial investments in AI infrastructure, while enterprise adoption follows a more measured path. Enterprise customers are proceeding cautiously with AI implementations, maintaining strong focus on return on investment, explainability, and security considerations. Most organizations are in early stages of adoption, primarily engaging in proof-of-concept projects with select forays into broader implementations. This careful approach reflects ongoing challenges including a fragmented vendor landscape, scarce AI talent and established best practices, and emerging legal and compliance risks.
The recent DeepSeek breakthrough signals a shift toward more efficient AI model training and deployment, lowering the cost to access AI models, which could improve return and accelerate adoption. However, we need additional confirmation points to validate this hypothesis and its potential impact on global IT spending patterns and competitive dynamics.
Recent trade policy developments are accelerating hardware purchases as customers seek to get ahead of potential tariffs. An additional 10% tariff on China imports took effect on Feb. 4, 2025. The U.S. paused 25% tariffs on Mexican and Canadian imports for one month after reaching agreements on border control. While we don't anticipate tariff-related rating changes for global tech companies, any escalation could increase economic uncertainty and create downside risk.
We are closely monitoring several key companies for tariff-related insights. These include Apple Inc., Dell Inc., HP Inc., Hewlett Packard Enterprise Co., and Cisco Systems Inc., given their high concentration of production in affected regions. They have significant exposure through smartphone, tablet, and laptop production in China, as well as server and networking equipment manufacturing in Mexico. We will also look to contract manufacturers for insights on how tariffs affect their broad customer bases.
The PC market showed signs of improvement with 1.8% growth in the fourth quarter of 2024, supported by government subsidies in China, strong year-end promotions in the U.S. and Europe, and some pull-forward of demand ahead of potential tariffs. We expect PC unit growth to accelerate to 3% in 2025 from 1% in 2024, driven by an aging COVID-19-era installed base and the October 2025 end-of-support deadline for Windows 10.
In the smartphone segment, year-over-year growth decelerated throughout 2024, ending at 2.4% in the fourth quarter. Despite the introduction of new AI features on many flagship smartphones, consumer demand has been relatively subdued. Chinese vendors increased production faster than their western counterparts, leveraging aggressive promotions and broad device portfolios across price segments, along with Huawei's market resurgence.
Notably, AI capabilities have not yet emerged as a significant driver of accelerated replacement cycles in either PCs or smartphones. While manufacturers continue to introduce AI-enabled devices, consumer and enterprise customers are still evaluating use cases and value propositions before making significant hardware investments. As a result, we project unit growth will slow to 2% in 2025 from 6% in 2024.
Hyperscale Capex Is Dead; Long Live Hyperscale Capex
Recent earnings reports from major hyperscalers demonstrate that capex plans remain aggressive. Companies are doubling down on AI infrastructure investments despite emerging efficiency gains in AI training and inference. We raised our forecast for combined capital spending growth at Alphabet Inc., Meta Platforms Inc., and Microsoft Corp. to 40% in 2025 from 20% before earnings disclosures. Alphabet's surprise announcement of $75 billion in planned 2025 capex (43% over 2024) follows similarly ambitious spending plans from Meta (68% over 2024, at the midpoint of the guidance range). Microsoft projected that capex for the next two quarters will be about the same as last quarter, which would mean about 40% growth for fiscal 2025 (ending in June).
Microsoft also said capex would rise slower in fiscal 2026 than in 2025, but that the mix would skew more toward short-lived assets such as data center equipment than land and buildings. If so, growth in spending on data center equipment will be greater than the headline capex growth rate would suggest. Amazon.com Inc. gave similar guidance, implying that capex for 2025 will be about $100 billion. Supply constraints continue to affect the sector, with Alphabet and Microsoft noting that demand exceeds available capacity. This supply-demand imbalance creates near-term revenue headwinds but also supports the case for accelerated infrastructure buildout.
The robust spending plans come amid DeepSeek's recent efficiency breakthroughs. However, rather than viewing these developments as a reason to curtail spending, hyperscalers are interpreting improved efficiency as a catalyst for broader AI adoption. Microsoft specifically noted that lower AI input costs would increase utilization of generative AI, citing the Jevons paradox, an economic theory that advancements in the efficiency of a resource increases its demand. Meta echoed this sentiment, emphasizing that robust infrastructure investments will represent a strategic advantage over time. Hyperscalers' aggressive spending plans don't necessarily contradict the DeepSeek developments. The mix of spending might change to incorporate more inference infrastructure and leverage abundant less capable but more cost-efficient chips. It may also take a few quarters before hyperscalers can update their data center roadmaps to take advantage of the efficiency breakthroughs.
At the same time, OpenAI Inc. and SoftBank Corp. are leading The Stargate Project, which represents a $500 billion investment over four years to increase OpenAI's access to compute beyond what Microsoft has provided. This adds incremental demand to the AI infrastructure buildout on top of hyperscale demand. With tech giants such as Arm Holdings PLC, NVIDIA Corp., and Oracle Corp. involved as technology partners, the project aims to build a cutting-edge AI computing system, starting in Texas. Microsoft retains rights to OpenAI's intellectual property, application programming interface exclusivity, and a revenue-sharing agreement through 2030, despite recent tensions over capacity.
Silicon Schism: AI Boom vs. Traditional Market Gloom
Diverging trends between AI and traditional end markets continue in the semiconductor industry. AI-related demand remains robust, with Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC) forecasting its AI accelerator revenue to double in 2025 and continue at a mid-40% compound annual growth rate through 2029. This strength is underpinned by aggressive hyperscaler capex plans, with Meta reiterating its 2025 guidance of $60 billion-$65 billion and Alphabet guiding for $75 billion.
However, demand in traditional end markets presents a more complex picture. PC makers are still working through excess semiconductor inventory. Intel Corp. notes that some customers may have pulled forward orders into the fourth quarter of 2024 due to potential tariffs, exacerbating the oversupply. This inventory digestion, combined with increased competition, contributed to Intel guiding next quarter's revenue below consensus expectations.
The automotive semiconductor market shows significant regional disparity. Texas Instruments Inc. reported that growth in China's automotive sector, driven by electric vehicles, was insufficient to offset broader weakness across Europe, the U.S., and Japan. NXP B.V. confirmed this view with expectations for continued customer inventory digestion in the U.S. and Europe, with Asia showing strength. This regional weakness, coupled with ongoing inventory corrections, suggests the automotive semiconductor market will remain weak in the first half of 2025 before improving in the second half.
Industrial end markets continue to face headwinds, though the outlook varies by subsector. While industrial automation and energy infrastructure segments are still declining, other areas have shown signs of stabilization. Similar to the automotive segment, we expect the industrial end market to remain weak in the first half of 2025 before a modest rebound in the second half.
The recent breakthrough by DeepSeek in AI model development, despite existing U.S. export controls, highlights the ongoing challenges in restricting China's technological advancement. This may prompt the U.S. to further tighten semiconductor export controls, even beyond the announcement of additional restrictions and expansion of the entity list to include more Chinese firms in January, prior to the broad impact.
Industrywide pricing pressures mark a return to pre-COVID behavior. Many companies anticipate low- to mid-single-digit percentage price declines for 2025 on a like-for-like basis. Some markets face more aggressive pricing pressure, particularly in China, where new domestic supply is ramping up quickly. Companies are implementing cost-reduction measures and focusing on improved product mix to maintain margins.
The industry faces several key challenges. These include managing the divergence between AI and non-AI demand, navigating geopolitical tensions and potential tariffs, and addressing capacity utilization issues in traditional segments while racing to expand AI chip production capabilities. TSMC's capex guidance of $38 billion-$42 billion for 2025 reflects the ongoing investment needed to meet surging AI chip demand, even as other segments work through cyclical challenges. The combination of inventory corrections in traditional markets, potential trade restrictions, and aggressive Chinese investment in mature node capacity suggests the semiconductor industry may face continued volatility through 2025, despite the robust AI-driven growth in advanced nodes.
Memory Lapse: Slowdown Next Quarter Before A Strong Second Half
Memory manufacturers brace for a significant downturn next quarter, a sharp reversal after more than a year of strong performance. Micron Technology Inc. guided for a roughly 20% sequential revenue decline, driven primarily by NAND weakness and softening commodity DRAM demand owing partly to PC and smartphone inventory digestion. We expect temporary moderation in even high-growth segments such as enterprise solid state drives (SSD) and high bandwidth memory (HBM). Micron notes a pullback in data center SSD purchases after several quarters of rapid growth. Samsung Co. Ltd. reported that HBM sales will pause next quarter following significant pull-ins last quarter. The weakness is broad-based. SK Hynix Inc. guided for a double-digit percent decline in DRAM bit shipments and a high-teens drop in NAND in the next quarter. Samsung similarly projected high-single-digit percent DRAM declines and low-teens NAND reduction, citing customer inventory adjustments and weaker mobile demand.
Despite near-term challenges, the structural transformation of the memory industry toward high-performance, AI-driven products continues. HBM remains a key growth driver, with Micron forecasting the market to exceed $30 billion in 2025 and potentially surpass $100 billion by 2030. Legacy memory products face particular pressure, with Chinese competition intensifying in trailing-edge DRAM segments. In response, major manufacturers are accelerating their shift away from legacy products, with SK Hynix planning to reduce its legacy mix from 20% to single-digit percents in 2025.
We anticipate a recovery in the second half of 2025, driven by multiple catalysts including the Windows 10 end-of-life transition, increasing memory content in AI PCs and smartphones, and continued data center expansion. Memory capex plans reflect this forecast, with players maintaining or slightly increasing spending but redirecting it toward HBM capacity and advanced packaging capabilities, reducing conventional memory spending.
Robust AI Spending And Constructive Enterprise Spending Drive Positive Rating Actions And New Issuers
Rating actions among U.S. tech companies trended positively, especially for issuers in the 'BB' category and above since the start of the fourth quarter. We took a few negative actions, mostly in the 'B' category and lower, consistent with our view of the 2025 technology credit landscape. Solid IT spending supports credit quality for most issuers and higher rates combined with diminishing prospects for aggressive rate cuts, posing risk to lower-rated issuers. A mix of robust AI spending and idiosyncratic competitive factors were behind several rating actions.
Among investment-grade issuers, we upgraded three entities and downgraded one. We upgraded Advanced Micro Devices Inc. to 'A' on continued share gains in its x86 products from Intel and robust growth in its AI accelerator products, which should support strong growth prospects. We also upgraded Broadcom Corp. to 'BBB+' on strong AI momentum that has improved its credit metrics. The positive outlook indicates the possibility of a higher rating if we believe it can maintain leverage below 3x while pursuing its acquisitive growth strategy. Although Broadcom has historically been aggressive with acquisitions, we believe its rapidly expanding scale has enhanced its debt capacity. The more challenging global regulatory environment could limit transformative acquisitions like those it made previously.
We downgraded Intel to 'BBB' due to continued operating challenges, higher-than-expected capital spending, and business uncertainty from management changes.
Among the speculative-grade issuers, we upgraded three entities and downgraded four. We raised the rating on Twilio Inc. to 'BB+' due to improved business operations, profitability, and free operating cash flow (FOCF) over the past few quarters. We downgraded Xerox Corp. to 'B+' as it faces execution challenges in its transformation plan, leading to a worse-than-expected revenue decline and negative FOCF, after we lowered the rating a quarter before to 'BB-' with a negative outlook. We also took three rating actions on Veritas Holdings Ltd.: downgrades to 'CC' and then 'SD' (selective default), and an upgrade to 'CCC'. The company entered into a transaction support agreement with a group of debtholders, which we view as a distressed exchange because of less than the original promise compensation for lenders and a risk of conventional default considering the upcoming maturity in 2025.
We revised five outlooks to positive and two to negative; all but one in the speculative-grade category, with the positive actions predominantly in the 'BB' category. We revised our outlook on Marvell Technology Group Ltd. to positive at the 'BBB-' rating as it continues strong multiyear tailwinds related to AI data center spending, improving operating scale. We also revised our outlook on ON Semiconductor Corp. to positive at the 'BB+' rating on robust EBITDA margins, conversative financial policy, and improved FOCF. We also revised the outlook on Seagate Technology Inc. to positive at the 'BB' rating as its hard disk drive market recovers from a significant industry downturn, driven by cloud service providers' increased capital spending. We revised our outlook on Ivanti Software Inc. to negative at the 'B-' rating on weak operating performance and an FOCF deficit, highlighting that negative actions are predominant in the 'B' category and lower.
We placed the ratings on two companies on CreditWatch with positive implications, including CommScope Holding Co. Inc. when it agreed with lenders for a debt refinancing and paydown. We did not view this transaction as distressed because CommScope's new debt was not issued at distressed levels and lenders received better pricing on the new debt.
Lastly, we assigned ratings to five new issuers due to ownership changes and acquisitions, reflecting an improving debt issuance environment. We assigned our 'BB' rating to Sandisk Corp. on its separation from Western Digital Corp., a tax-free spin-off of its flash memory business to existing shareholders. While the debt load is manageable, the company will remain one of the smaller players in a volatile NAND market. We assigned a 'B' rating to billings management software-as-a-service company Zodiac Purchaser LLC and a 'CCC+' rating to network performance monitoring company Riverbed Holdings Inc. upon acquisition agreements by financial sponsors. We assigned a 'BB-' rating to accounting, reporting, and analytics solutions provider Clearwater Analytics LLC and a 'B' rating to data security and management software provider Clover Holdings 2 LLC (dba Cohesity) upon their intentions issue debt to support acquisitions.
Related Research
- Seek And Deploy: How DeepSeek Is Reshaping U.S. Tech Industry's Competitive Dynamics, Feb. 5, 2025
- Why Isn't AI Shaking Up Smartphone And PC Markets?, Feb. 5, 2025
- Proposed Tariffs Could Hurt The Global Tech Sector If Levied Too Long, Feb. 4, 2025
- U.S. Technology Sector: Another Attempt At A Cyclical Rebound, Jan. 15, 2025
- Industry Credit Outlook 2025: Technology, Jan. 14, 2025
- Solid IT Demand Bodes Well For Technology Credits In 2025, Jan. 8, 2025
This report does not constitute a rating action.
| Primary Credit Analyst: | Christian Frank, San Francisco + 1 (415) 371 5069; christian.frank@spglobal.com |
| Secondary Contacts: | David T Tsui, CFA, CPA, San Francisco + 1 415-371-5063; david.tsui@spglobal.com |
| Neilson H Lin, New York 212-438-1233; neilson.lin@spglobal.com | |
| Research Assistant: | Saurabh B Tarale, Pune |
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