Overview
When the cost of intelligence falls faster than the price of software, margins compress. The AI Margin Compression Index reads the macro thesis Palanor has been writing into — that the software-sector margin structure of the 2010s and early 2020s is unstable in the AI era. v2 (this version) adds quarterly hyperscaler AI capex to the composition; v1 relied entirely on proxy signals.
What changed in v2
v1 had no direct read on hyperscaler AI capex — the most important input to the compression thesis. v2 adds four manual-entry components — Microsoft, Alphabet, Meta, and Amazon AWS AI capex per quarter, sourced from public 10-Q filings. These now carry 50 percent of the index's total weight; the v1 proxy components (Nasdaq, ISM Services, GitHub trending, wage growth, PPI, industrial production) retain the other 50 percent. Expect v2 readings to diverge from v1 — that divergence is itself informative.
Why these components
AI capex by the top four hyperscalers is the closest public-data proxy for the cost of building intelligence at scale. Rising capex sustains the supply build that ultimately compresses unit cost of inference — and therefore compresses software pricing power. The v1 proxies remain because they capture the demand side: if Nasdaq is strong and ISM Services is strong, the compression pressure is being absorbed; if both weaken alongside accelerating capex, the thesis is materializing.
Methodology
Capex components transform via 12-month percentage change — the level grows over time, so we read acceleration rather than level. v1 proxies transform via 24-month z-score (level-based, mean-reverting). Weighted sum, sign-flips on negative-direction components, logistic scaling to 0-100. Thesis bands: 0-35 weak, 35-65 baseline, 65-100 accelerating. Manual-entry values refresh quarterly — see the manual entry surface in the admin panel (planned).
Interpretation
A reading above 65 with rising trend is the macro environment Palanor has been warning about — capex accelerating into a demand stack that cannot price the new supply. A reading below 35 with stable trend is the opposite — the thesis is being absorbed by services strength and the proxy market reading is holding.