Is the AI boom cracking? Wall Street's tech sell-off raises questions over what comes next

Wall Street's technology-led rally is facing a reality check, with a sharp sell-off in tech stocks raising questions over whether the artificial intelligence (AI) boom that has powered the equity bull market has run too far. Disappointing earnings and aggressive AI spending plans triggered the worst decline in US stocks since June on Friday. The Nasdaq 100 plunged 3.5%, briefly crossing the threshold for a technical correction, while the S&P 500 fell 1.8% and breached its 100-day moving average. Read More: What's fuelling the Nasdaq crash? AI spending fears, Intel rout and Anthropic debt concerns drive selloff Intel Corp. slumped 29%, its steepest fall in more than four decades, after a weak sales forecast.

The sell-off spread to other chipmakers, including Nvidia Corp. and Broadcom Inc. Amazon.com Inc. and Alphabet Inc. also declined after sticking with aggressive AI investment plans even as their core businesses showed signs of slowing. The market rout reflects growing investor concern that the returns from massive AI investments may take longer to materialise than previously expected. A three-week decline in technology shares culminated in Friday's sell-off, as investors reassessed whether the profits generated by AI would justify the scale of the spending and borrowing involved. According to Bloomberg, the core businesses of major US technology companies -- advertising, consumer and retail operations -- are beginning to show signs of slowing.

These businesses underpin an estimated $750 billion in AI spending this year. "The revelation that these hyperscalers are seeing a slowdown in their core businesses means that the big payoff that everyone has been saying will come eventually is getting pushed even further down the road," Matt Maley of Miller Tabak told Bloomberg. AI spending comes under scrutiny The pressure is not limited to share prices. S&P Global Ratings lowered its outlook on Meta Platforms Inc.'s AA- credit rating to negative on Friday, citing rising spending on AI infrastructure and concerns over the company's ability to generate returns from those investments.

The concerns come as Meta faces scrutiny over its future spending commitments. Earlier this month, the company disclosed more than $800 billion in future spending commitments, with nearly half linked to leases that have not yet commenced, largely for data centres and energy infrastructure. Despite questions from investors about returns on AI investments, Meta executives have reiterated the need for continued spending. Other technology companies are also exploring ways to finance their AI expansion while preserving financial flexibility. Amazon has set up supplier financing arrangements that could allow it to borrow as much as $80 billion against the value of hardware it purchases, Bloomberg reported.

Alphabet's Google, meanwhile, is in talks with the US Defense Department on a data security initiative linked to the $185 billion Golden Dome missile defence programme, according to people familiar with the matter, Bloomberg reported. Is the AI trade losing momentum? The latest sell-off has intensified concerns that the strongest phase of the AI investment cycle may be behind the market. While demand for AI remains robust, investors are increasingly questioning whether the scale of capital expenditure will translate into earnings growth quickly enough to justify current valuations. Ulrike Hoffmann-Burchardi of UBS Chief Investment Office told Bloomberg that the market faced a rising risk of "mid-cycle capital expenditures indigestion".

However, she said the broader outlook for equities remained positive and advised investors to diversify beyond technology stocks. "We continue to see scope for equity gains overall and believe investors should focus on building a resilient portfolio that includes exposure beyond tech," she said. The shift in sentiment is also visible in the performance of major companies. Apple Inc. reclaimed its position as the world's most valuable company from Nvidia, as investors sought the perceived safety of the iPhone maker amid concerns over AI spending. The technology and communication services sectors have also faced growing pressure, while investors have moved towards more defensive parts of the market.

Maley said the rotation into other sectors, which has helped support the US stock market, could lose momentum if the broader market starts falling more sharply. "If the major averages begin to drop in a more compelling manner, it is very likely that investors will stop rotating into other sectors and start rotating into cash," he told Bloomberg. What comes next for markets? The immediate question for investors is whether the technology sell-off represents a correction in an otherwise strong AI investment cycle or the beginning of a broader reassessment of the sector's growth prospects. Read More: October ends with a thud for Intel, Reddit, AI stalwarts The scale of AI spending remains substantial, but investors are demanding clearer evidence that the investments will generate returns.

Slowing growth in the core businesses funding that expansion could make it harder for technology companies to sustain their current spending pace without putting further pressure on balance sheets. The pressure has also extended beyond equities. Cryptocurrency markets came under renewed selling pressure after Binance disclosed a record hack, reviving concerns over the security of customer assets. Higher oil prices added to market anxiety amid speculation that the US could resume strikes against Iran. Read More - $6.3 billion stolen in 20 minutes: How hackers pulled off the Binance heist and why North Korea is suspected US Treasuries were largely unchanged on Friday but recorded a strong month, reflecting the broader shift towards defensive assets.

For now, the AI investment story remains intact, but the market's expectations appear to be changing. Investors are no longer looking only at how much companies are spending on AI; they are increasingly asking when that spending will translate into sustainable earnings and cash flows.