Investors are increasingly worried about excessive capital expenditure and spending by AI companies, which analysts like Kyle Rodda from Capital.com believe will ultimately eat into returns. This sentiment is fueled by Nvidia Corp.'s recent deals worth over $750 billion, leading to fears of artificially inflated demand for AI. Google's parent company, Alphabet Inc., further exacerbated these concerns by raising its capital spending forecast to as much as $205 billion for the year, reigniting questions about the fiscal discipline in the race for AI dominance. This has led to a significant sell-off in AI-related stocks, particularly chipmakers.
Chip stocks have been heavily affected, with the iShares Semiconductor ETF (SOXX) down more than -3% and at a one-week low. Companies like Sandisk, Advanced Micro Devices, and Western Digital saw declines of over -11%, -6%, and -6% respectively. Other major chip manufacturers such as Lam Research, ASML Holding NV, Micron Technology, Applied Materials, and Seagate Technology Holdings Plc also experienced drops exceeding -5%. Analysts, including Hebe Chen from Vantage Global Prime, note that "doubts over spending, returns and valuations are still deepening rather than fading" in the AI sector.
The broader market reflects these anxieties, with the Nasdaq Composite Index shedding 0.18% to 24,932.08 and the tech-heavy Nasdaq having lost 2% over the week. The Dow Jones Industrial Average, however, rose 0.51% to 52,210.08, and the S&P 500 added 0.02% to 7,413.18, suggesting a mixed market struggling with the tech sector's downturn. The concern over AI spending is particularly critical as major tech companies like Microsoft Corp., Meta Platforms Inc., Apple Inc., and Amazon.com Inc. are reporting earnings this week, with investor focus heavily on their capital expenditure guidance and AI monetization metrics.
Adding to the unease is a report that a Chinese state-backed company has begun mass-producing immersion deep ultraviolet lithography machines, impacting shares of Japanese chip-equipment makers like Nikon Corp. and Tokyo Electron Ltd., which both slid more than 9%. The overall market sentiment is also influenced by geopolitical tensions and oil prices, as well as the upcoming Fed policy announcement, where traders see a roughly one-in-three chance of a rate hike. This confluence of factors paints a picture of heightened uncertainty and choppiness in the markets, particularly concerning the AI sector's long-term sustainability and profitability.
