(Bloomberg) — The Nasdaq 100 Index inched closer to a correction Tuesday as the selloff in semiconductor stocks turns ugly with investors questioning the amount of money Big Tech is spending on artificial intelligence.
“The AI trade is being looked at with a much greater degree of skepticism, and the shift in sentiment means it has become something of a one-way trade with things getting sold unmercifully,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott.
The recent retreat in the tech-heavy Nasdaq 100 marks a reversal for some of the market’s biggest winners over the past several years as Wall Street increasingly worries about the eventual payoffs from AI investments, which continue to rise.
The tech-heavy Nasdaq 100 fell 1% and is down 9.5% from the record set on June 2, just shy of the 10% technical threshold for a correction. It’s still up 10% for the year after rising 20% in 2025. The Philadelphia Stock Exchange Semiconductor Index, or SOX, sank 4.5% and has lost 25% since hitting a high on June 22, surpassing the technical definition of a bear market. It has gained 56% this year, but had more than doubled at its peak.
“It’s a negative feedback loop because there are a number of companies that once had very high free cash flow, but spending on AI has diminished that or even turned them cash-flow negative,” Luschini said. “Investors are selling on that trend, which also raises the prospect that the spending could be curtailed. People are taking that to its logical conclusion, and selling the names that have benefited from the spending.”
To Luschini’s point, chipmakers have been the primary beneficiaries of AI spending, and their stocks are now struggling the most. The losses are deepening as signs of progress in China’s advanced chipmaking industry compound worries about the sustainability of the AI spending boom.
Last week, Alphabet Inc. suffered its biggest one-day drop in more than a year after it reported negative free cash flow for its first time as a public company due to its heavy AI capital expenditures. Google’s parent also signaled a lot more spending going forward, which overshadowed a number of positives, including robust growth in its cloud-computing business.
Microsoft Corp., Meta Platforms Inc. and Amazon.com Inc., all big AI spenders, report earnings this week.
“People are worried about capital spending, the return on that spend, the level of free cash flow, and there’s some dis-investment going on ahead of the Big Tech reports we’re seeing this week,” said Jim Awad, senior managing director at Clearstead Advisors. “If they’re able to prevail and reassure people this week, that will add a lot of support to the market. On the other hand, if we see more negative cash flow, a lot more spending, I think we can expect to see the group remain under pressure.”
–With assistance from Youkyung Lee, Winnie Hsu, Sagarika Jaisinghani and Alice French.
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