For quite some time now, investors have fought the suggestion that the artificial intelligence industry may be forming a massive bubble, risking an eventual collapse of epic proportions that could take down the US economy with it.
But shaking off those fears has proven increasingly difficult as the tech stock market reels from a major selloff this week.
Amazon shares tumbled nine percent Friday morning after claiming that its spending would hit an astronomical $200 billion this year as part of its efforts to keep up in the ongoing AI race. Shares are down over eight percent over the last five days, indicating it’s not just a blip.
Microsoft has been hit hard lately as well, with shares also plunging almost eight percent over the last five days, following its biggest single-day loss since the pandemic last week.
Other tech companies, including AI chipmaker Nvidia, Oracle, Alphabet, and Meta, all saw their shares drop significantly this week as they indicated they remained committed to spending vast sums to scale up their AI infrastructure investments.
As CNBC reports, around $1.35 trillion in valuations has been wiped out as Big Tech companies committed to spending a total of $660 billion this year alone, a “breathtaking” figure, as AllianceBernstein head Jim Tierney told the Financial Times.
But it doesn’t take much reading between the lines to figure out that investors are becoming incredibly antsy about those enormous spending plans. A short-term return on investment for AI-focused infrastructure buildouts is certainly out of the question as tech leaders continue to reassure them that it will all be worth it in the end.
The selloff could mark the beginning of a much larger downturn, analysts fear.
“Questions over the extent of [capital expenditures] as a result of LLM build-outs, the eventual return on that, and the fear of eventual over-expansion of capacity will be persistent,” GAM Investments investment director Paul Markham told CNBC.
With its $200 billion spending target, a significant 56 percent increase over last year, Amazon has positioned itself as the biggest spender. Yet the stock tumble indicates it’s not what investors wanted to hear.
“We have suddenly gone from the fear that you cannot be last, to investors questioning every single angle in this AI race,” Quilter Cheviot consumer discretionary analyst Mamta Valechha.
Further adding credence to the theory that investors are getting spooked by the enormous amount of money companies are continuing to pour into AI is Apple, whose far more muted approach appears to have paid off — with its shares instead up a whopping seven percent since Monday.
“The market is rethinking its approach to AI,” M&G chief investment officer for equities Fabiana Fedeli told the FT, arguing that investors are “a lot more selective in which companies [they] will decide to bet on.”
More on the tech selloff: Investors Dumping American Stocks as the Country Bets Everything on AI