Cloud revenues are soaring, driven largely by burgeoning demand for processing and storage capacity to support AI-powered applications. Cloud service providers are scrambling to meet this demand by expanding their data centre footprints.
In addition, regions like EU are showing increasing desire for sovereign cloud solutions, and providers see significant potential for future revenue expansion.
At the same time, a tense geopolitical climate and recent military action in the Middle East are contributing to a sense of unease about the cloud market’s near term outlook, according to GlobalData.
GlobalData’s latest report, “Cloud Watch Q1 2026: AI Drives Expansion, but the Economic Fallout from a Stormy Geopolitical Climate Could Disrupt Growth,” examines some of the trends surfacing in the cloud services sector this year, including the outsized role AI is playing in the market.
The report reveals that most hyperscalers continue to invest heavily in infrastructure buildouts, citing AI as a major factor. AWS’ 2026 investment is expected to come in around $200-billion, an increase of more than 50% over the previous year. Google is projected to spend up to $185-billion on infrastructure spending this year, with a focus on tensor processing unit (TPU) and graphic processing unit (GPU) solutions.
Amy DeCarlo, principal analyst enterprise technology and services at GlobalData, comments: “Sky-high expectations for AI, amid concerns about whether returns on investment will be sufficient, raise questions about whether the AI bubble is bursting.
“At the same time, IT teams worry about threat actors leveraging AI in attacks that could overwhelm existing security infrastructure. Any one of these issues could dampen demand for future processing, storage, and connectivity.”
The war in Iran is affecting the cloud sector beyond the resulting increase in energy costs.
When the US and Israel initiated attacks against Iranian leaders, military infrastructure, and nuclear facilities in February, the fallout for technology companies in the region was immediate.
AWS’ infrastructure in the UAE and Bahrain was hit by Iranian drones, and widespread regional cloud service disruptions followed, impacting a host of digital services, including payment systems and supply chains.
As a result of the service disruptions, AWS waived all charges in March for the ME-CENTRAL-1 (UAE) region.
With data centre facilities targeted in a hot war zone, cloud providers are at the very least considering a more cautious approach to funding expansion in the Middle East. Enterprises are also again considering the importance of moving from single-region cloud deployments to geographically diverse implementations.
DeCarlo adds: “While this is certainly not a new conclusion, the reality is that many organizations haven’t opted for this approach. Even as many organizations seek a more consolidated and localised strategy for data residency purposes, there are risks in centralizing high-value resources in a single region.
“This runs counter to the trend in many countries to reclaim control of precious data through digital sovereignty.”
Geopolitical tensions involving Russia, China, and the US, as well as fears of foreign surveillance are prompting governments and corporations to seek digital sovereign solutions that address in-region data residency.
AI is also a factor, as organisations consider a cloud provider’s national affiliation given its access to high-value data.
Effective security has always been a foundational element of any cloud service. Hyperscalers and other cloud service providers make a point of highlighting their investments in security, both organically and through acquisitions.
To this end, in March, Google closed its $32-billion acquisition of security platform vendor Wiz.
DeCarlo concludes: “While in the early days of cloud computing, many organizations were wary of cloud providers’ ability to properly secure their infrastructure, confidence in their capabilities has grown over time.
“Many IT decision makers see hyperscalers and other cloud providers as offering superior protections to what the customers can provide on their own premises.”