The AI boom faces a "wake-up call" again, with the Nasdaq plunging over 2%

Southern Finance, 21st Century Business Herald Reporter Wu Bin Reports

Investors’ enthusiasm for the AI boom has fueled a three-year bull market in U.S. stocks, but now that momentum is faltering.

On February 12, Eastern Time, the Dow Jones Industrial Average closed down 1.34%, at 49,451.98 points; the S&P 500 fell 1.57%, to 6,832.76; and the Nasdaq dropped 2.03%, to 22,597.15.

Recently, market sentiment has shifted to concerns over AI’s disruptive potential, impacting industries such as software, legal services, and wealth management. Investors are re-evaluating how to assess the value of these companies.

Even the relatively strong employment data recently has failed to boost U.S. stocks. In January, non-farm payrolls increased by 130,000 jobs, well above Wall Street expectations, and the unemployment rate fell from 4.4% in December to 4.3%. However, after a brief rally, the market has once again weakened.

Questions Surrounding Massive Spending Returns

Google, Meta, Microsoft, and Amazon have all announced large capital expenditure plans. These four tech giants will collectively spend up to $650 billion this year, mainly on expanding AI infrastructure.

Concerns about whether these tech giants can generate sufficient returns from such high capital spending have caused Microsoft and Amazon stock prices to decline by double digits after their earnings reports.

UBS has downgraded the U.S. information technology sector to “Neutral.” With soaring corporate spending, increasing uncertainty in the software industry, and overvalued hardware sectors, risks are rising.

UBS estimates that this year’s capital expenditure by large U.S. corporations could reach $700 billion, more than quadruple what it was three years ago. Currently, this level of investment has “almost consumed 100% of the operating cash flow of these large companies.”

Investor concerns about the sustainability of these tech companies’ cash flows could impact market sentiment, as their capital expenditures increasingly rely on debt or equity financing.

Sector Rotation Is Evident

Recently, a clear trend of sector rotation has emerged in the U.S. stock market. Tech giants like Amazon and Alphabet (Google’s parent company) announced massive capital expenditure plans. Coupled with growing investor concerns over Anthropic’s new tools, many AI-related stocks have been sold off, with funds flowing into value stocks in other sectors.

Bank of America believes that since 2020, the dominance of tech giants represented by the “Big Seven” in the U.S. stock market faces “significant threats.” As midterm elections approach, investors are gradually shifting toward small- and mid-cap stocks.

Michael Hartnett, Chief Investment Strategist at Bank of America, stated that the large capital expenditures by U.S. tech giants on AI mean these companies “no longer have the best balance sheets or the capacity for the largest share buybacks.” The shift from a light-asset to a heavy-asset model poses a major threat to the market leadership of large tech firms since the 2020s.

However, many analysts remain optimistic about the future. Morgan Stanley’s Chief U.S. Equity Strategist Michael Wilson believes that, supported by the AI boom, the revenue outlook for the tech industry remains strong, and U.S. tech stocks have room for further gains. After recent market volatility, valuations for tech stocks have declined. Meanwhile, the sharp drop in software stocks has created “attractive buying opportunities” for stocks like Microsoft and Intuit.

Looking ahead, Wilson notes that the fundamental factors supporting AI-enabled sectors remain positive, and the investment value of AI-related stocks is still undervalued. Companies applying AI to their core businesses, rather than those merely developing technology and infrastructure, have more opportunities.