- Investors are beginning to question tech companies' wasteful spending on artificial intelligence.
- The Nasdaq Composite Index fell more than 3% on Wednesday, its worst performance since 2022.
- As earnings season for big tech companies gets underway, investors grilled Alphabet on its AI spending and return on investment.
Big tech companies appear to be falling into trouble territory again.
In 2022, U.S. tech companies struggled with declining demand after aggressively expanding during the pandemic, leading to a selloff in tech stocks.
But a surge in artificial intelligence investments in 2023 has reversed the downward trend, with the S&P 500 up 40% since the start of 2023 and the tech-heavy Nasdaq up 60% in the same period.
Now investors are starting to get nervous, with U.S. stocks being sold off on questions about whether too much money is flowing into AI.
Major stock markets are being driven by “investor optimism that seems bordering on complacency,” Michael Strobeck, global chief investment officer at Swiss private bank Lombard Odier, wrote in a report this week.
“While enthusiasm for artificial intelligence has sent some U.S. stocks soaring, with the S&P 500 and Nasdaq hitting new all-time highs, performance has been highly concentrated among a few large stocks,” Strobeck wrote.
This concentration makes the impact of a big technology company's stock price falling sharply all the more pronounced.
All major U.S. stock indexes closed lower on Wednesday, with the Nasdaq Composite Index dropping more than 3%, its worst trading day since October 2022. Meanwhile, the Nasdaq 100 Index lost $1 trillion, according to Bloomberg.
Among the stocks that fell were Wall Street's AI chip darling Nvidia, which closed down about 7%, and Alphabet, which closed down 5% after reporting mixed second-quarter earnings.
Investors grilled Google parent Alphabet about the progress of its AI initiatives and their potential for revenue generation, but Google executives offered few clues, according to Business Insider's Catherine Tangarakis Lippert.
Attention on the rest of the big tech companies
Other big tech companies, including Amazon, Apple, Microsoft and Meta, also report quarterly earnings next week, and investors will be watching to see what these companies bring to the table in the near term after investing so much money in AI.
“The key question to ask is how much are companies willing to spend to get ahead in the AI race?” Deutsche Bank research strategist Jim Reed wrote in a note on Wednesday.
Reid acknowledged that the race for the best AI models is “not cheap.” [any dollar signs attached here? —> doesn’t have his own forecast but cited this fig: CEO of Anthropic — the AI company Amazon is betting billions on — says it could cost $10 billion to train AI in 2 years]
Some analysts have warned that investor enthusiasm for AI is akin to a market bubble.
As Lombard Odier's Strobeck wrote, the risk of a market reversal is rising, but technology stocks have been the big winners so far, so some money is likely to flow to other stocks and sectors.
When it comes to big tech companies, they seem to believe it's better to be safe than sorry — because they can afford to do so.
In April, Google's AI chief said the company planned to invest more than $100 billion over the long term. AI technology development.
“As you navigate this curve, the risk of underinvesting is much greater than the risk of overinvesting, even if you turn out to overinvest,” Google CEO Sundar Pichai said in the earnings call on Tuesday.
