The Nasdaq 100 Index is trading near a correction, driven by a notable sell-off in semiconductor stocks as investors increasingly question the substantial spending by Big Tech on artificial intelligence. The tech-heavy Nasdaq 100 recently fell 0.6 per cent, now down 9.3 per cent from its June 2 record high, just shy of the 10 per cent technical threshold for a correction. This represents a dramatic reversal for many of the market’s top performers, with Wall Street scrutinising the eventual payoffs from escalating AI investments.
The Philadelphia Stock Exchange Semiconductor Index, or SOX, declined 4 per cent and has plummeted 24 per cent since its June 22 peak, officially entering a bear market. Mark Luschini, chief investment strategist at Janney Montgomery Scott, observed that the AI trade is now viewed with greater scepticism, leading to significant selling pressure. He highlighted a “negative feedback loop” where extensive AI spending has diminished or even turned previously high free cash flow for several companies into negative territory, prompting further investor selling. This trend also raises the prospect of curtailed spending.
Concerns about the sustainability of the AI spending boom are intensifying. Alphabet, Google’s parent company, which operates a diverse portfolio of businesses including its dominant search engine and cloud computing, recently suffered its largest one-day drop in over a year. This followed reports of negative free cash flow, a first for the public company, attributed to heavy AI capital expenditures and signals of continued significant spending. Microsoft, Meta Platforms, and Amazon, all substantial AI investors, are scheduled to report earnings this week. Jim Awad, senior managing director at Clearstead Advisors, stated that investors are worried about capital spending, return on investment, and free cash flow levels, with “dis-investment” occurring ahead of these key Big Tech reports.
