China is emerging as the strongest long-term contender in the global artificial intelligence (AI) race despite heightened volatility in semiconductor stocks, according to a report by global brokerage Jefferies.
The report argues that China is particularly well positioned to dominate consumer-facing AI applications, even as investors grow increasingly cautious about the sustainability of massive AI infrastructure spending by global technology companies.
Jefferies noted that the recent correction in semiconductor stocks has pushed many chipmakers close to their 200-day moving averages, prompting questions over whether the sell-off is simply a technical correction or an early indication of slowing capital expenditure by global hyperscalers.
Despite these concerns, the brokerage said there is little evidence so far that AI investment is slowing. Recent quarterly earnings have not pointed to a broad-based pullback in AI spending, and analysts have largely maintained earnings forecasts for memory-chip companies. However, investors have started reacting negatively to rising capital expenditure, signalling growing unease over the pace of AI investments.
“The Chinese are best positioned to prevail in AI, particularly in the mass consumer market,” Jefferies said in the report.
The report highlighted mixed investor reactions to recent earnings from major technology companies. Alphabet came under pressure after reporting negative free cash flow in the second quarter of 2026—the first such instance since its 2004 initial public offering.
Meanwhile, Meta Platforms saw its shares fall 10 per cent in after-hours trading after free cash flow plunged 91 per cent, dropping from $ 8.5 billion in the second quarter of 2025 to $ 784 million in the same quarter this year. The company also raised its 2026 capital expenditure guidance to between $130 billion and USD 145 billion.
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In contrast, Microsoft gained around 8 per cent in after-hours trading after maintaining its capital expenditure guidance at approximately $ 175 billion for calendar year 2026. Jefferies noted that the figure had been revised from an earlier estimate of $ 190 billion due to accounting changes related to asset life and lease classification.
According to the brokerage, demand for computing power is expected to continue rising throughout the AI era, although the customer base driving that demand could evolve over time.
Jefferies also argued that the AI industry may ultimately resemble the airline sector rather than the internet’s winner-takes-all model. While companies are investing aggressively in AI infrastructure today, heavy capital expenditure alone may not guarantee outsized returns, suggesting that future winners will be determined by execution, efficiency, and the ability to capture end-user demand rather than spending alone.
