On Tuesday the Nasdaq and the S&P 500 closed at more than one-week lows, driven by losses in tech stocks as investors questioned growing AI debt, and anticipated more tightening with the Fed.
Advocates of AI champion it as a revolution for the world economy. It’s an expensive revolution however, just four companies, Amazon, Meta, Microsoft, and Alphabet look to spend $720 billion on AI data centers this year.
Investors are now looking at the enormous amounts of money being spent and wondering if AI can generate the profits needed to make the investment worth while. AI companies are holding bond offerings, with SpaceX being the latest, to finance their goals.
These bond offerings leave investors concerned about the possible dilution of shares and the interest expense from the bonds.
“Some of the news lately about AI raises questions about all the spending that’s being done and the capex and ramping of the capacity for semiconductors,” Globalt senior portfolio manager Thomas Martin said.
Nvidia and Alphabet fell along with chipmaker’s Intel, Marvell, and AMD. Piling on the pressure, memory chip companies SK Hynix and Samsung sank by over 12%.
This overwhelming drop in the sector puts Micron’s earnings front and center as the company announces on Wednesday. Shares in Micron over 13% Tuesday.
Another factor is Fed rate hikes. Bank of America revised its outlook for Federal Reserve policy, now expecting three quarter-point rate hikes starting in September. A more hawkish Fed forecast is forcing investors to sell off their winners and rush to safety like healthcare and 10-year bonds.
This shift in policy creates a higher-for-longer economic framework, reshaping funding costs, loan demands, and profitability assumptions. A change like this can reduce intended spending on data centers, chips, acquisitions, and AI development, especially at a time when investors are questioning the worth of the investment.
