AI Spending Fears Trigger Major Tech Stock Sell-Off on Wall Street

US technology stocks experienced a significant downturn as investors expressed concerns about the long-term viability of substantial capital expenditures in Artificial Intelligence (AI). The Nasdaq Composite, a key index heavily weighted with AI-focused companies, saw its sharpest decline since June 5, falling 2.6 percent on Thursday. The broader S&P 500 index also registered a notable drop of 1.21 percent, its largest fall since late July.

Most of the prominent "Magnificent 7" companies, which collectively represent over a third of the market's value, suffered considerable losses, with Apple being a notable exception, posting a slight gain. Meta's stock plummeted by nearly 7 percent following its announcement of increased capital spending projections for the year, set between $135 billion and $145 billion, despite its net profit falling below market expectations. Amazon declined by 4.6 percent, and Nvidia dropped 4.4 percent. Tesla and Alphabet each fell 3.1 percent, while Microsoft saw a 2.2 percent decrease.

The sell-off was not limited to these giants, extending to other major tech players. Intel and Advanced Micro Devices both experienced losses of approximately 8 percent, and Broadcom slid 4.3 percent. Following these declines, the Nasdaq is now about 5.8 percent below its all-time high, which was reached on October 6.

Adding to the market's cautious sentiment were rising oil prices. Brent crude futures increased by 4 percent on Thursday and continued to climb on Friday morning, surpassing $114.20 a barrel, the highest level since May. This surge in oil prices is attributed to the geopolitical fallout from the US-Israel war impacting Iran.

The negative trend extended to Asian markets, with major stock exchanges opening lower on Friday. Japan's Nikkei 225 fell over 2 percent in early trading before partially recovering, while South Korea's KOSPI dropped as much as 3.5 percent. Hong Kong's Hang Seng Index saw a decline of about 0.5 percent.

According to Jay Goldberg, a senior analyst at Seaport Research Partners in San Francisco, market volatility appears to be driven more by investor sentiment than by fundamental economic factors. He noted, "In short, nothing has changed. Investors have just decided to be afraid this week. Everyone I speak to points to a different cause for the downfall … It’s just a giant wall of worry." Goldberg elaborated that while legitimate concerns about the AI trade exist, the current market shifts are largely fueled by investor psychology rather than concrete reasons.

The substantial investments made by US tech companies in AI have ignited a debate about the potential for a market bubble, reminiscent of the dot-com era. Some analysts view the current spending on datacenters and graphics processing units as unsustainable, while others contend that AI's transformative potential justifies the significant financial commitments. Global AI investment is projected to reach $2.7 trillion in 2026 and $3.6 trillion in 2027, according to Gartner.