Tech stocks tumble as AI spending concerns deepen

A sharp sell-off in technology shares swept through global markets Tuesday, as investors questioned whether the enormous spending behind the artificial intelligence boom can justify the valuations that have pushed major indexes to record highs.

The tech-heavy Nasdaq closed more than 2% lower, with The Guardian reporting a 2.2% drop and the BBC saying it fell about 3% by the end of trading. The S&P 500 was down 1.43% Tuesday afternoon, while the Dow was broadly steady, according to The Guardian. The reversal shifted market attention away from developments in the U.S. war with Iran and toward the durability of the AI trade that has powered stocks higher this year.

All three major U.S. indexes have set records this year amid a rush of funding for AI technology and infrastructure. The Nasdaq is up 10% for the year, the Dow has gained 6% and moved past 51,000 points, and the S&P 500 is up 7.3%, The Guardian reported. But the scale of the rally has sharpened concerns about concentration: seven technology companies account for 30% of the S&P 500’s value.

Some economists have warned that the surge in AI spending resembles the dot-com bubble that burst in the early 2000s. Those concerns have been compounded by signals from the Federal Reserve last week that it may raise interest rates to combat rising inflation, which would increase borrowing costs.

“The market just continues to oscillate between ‘AI is going to be great and increase productivity and all these companies are going to win’ and ‘AI is a big waste of time and it’s not worth the return on investment at all and this is all one big bubble,’” said Gil Luria, head of technology research at investment firm D.A. Davidson, in comments reported by NPR.

The selling began Monday, when Google parent Alphabet had its worst trading day in more than a year after two high-profile AI researchers left the company. Alphabet shares fell 5% by Monday’s close and were down again Tuesday, NPR reported. Nvidia, another emblem of the AI boom, also fell for a second straight day.

Chipmakers were hit especially hard. Micron Technology plunged more than 13% Tuesday, according to NPR, after rising nearly 800% over the past year on demand for memory chips tied to AI infrastructure. Intel and Advanced Micro Devices were each down around 6%. A global index of chip companies also slid, the BBC reported.

SpaceX, newly public since June 12, added to the unease. The Guardian reported that Elon Musk’s aerospace company dropped 16% Monday as its post-IPO boost faded and said the company announced plans to raise $20 billion in a bond sale after gaining more than $85 billion through its IPO. The BBC reported that SpaceX fell below its $150 initial flotation price during a volatile session before recovering to close around $156.

“SpaceX is not yet part of the Nasdaq indices, but the fact that it is jumping on the bond train to fund excessive AI and infrastructure spending revives earlier concerns that Big Tech may be spending too much on AI infrastructure and increasingly financing that spending through debt,” said Ipek Ozkardeskaya, a senior analyst at Swissquote. She noted that Morgan Stanley has estimated AI-related borrowing will surpass $500 billion this year.

The pressure spread overseas. South Korea’s benchmark index closed 10% lower Tuesday after Samsung Electronics and SK Hynix both fell more than 12%, according to The Guardian. Japan’s Nikkei 225 ended down 3.5%. London’s FTSE 100 avoided the sell-off and was steady or positive, helped by its smaller exposure to technology shares, analysts told the BBC.

AI investment has been vast. NPR, citing Stanford University’s AI Index Report, said corporate investment in AI totaled more than $580 billion globally in the past year, following more than $1 trillion over the previous four years. With OpenAI and Anthropic considering stock sales in what NPR described as potentially two of the largest IPOs in history, investors are now looking for evidence that AI spending can translate into profits.

“The market is trying to kind of digest all this and saying, ‘Are we going to start to see returns?’” said Mark Vena, CEO of SmartTech Research.