For the past few years, artificial intelligence has been Wall Street’s favourite investment story. Pour billions into chips, build data centres, promise a revolution and watch valuations soar. But the mood music is changing. Investors are beginning to ask an increasingly uncomfortable question: When, exactly, will all this spending start paying off?The answer is becoming more important as some of the biggest names in technology face a bruising week. Google’s parent Alphabet suffered a record one-day fall, wiping more than $500 billion off its market value. Intel’s shares plunged on a weak outlook, Amazon came under pressure over its spending and sales forecasts, while China’s blue-chip stocks recorded their steepest monthly decline in more than a decade.From Silicon Valley to Shanghai, the AI trade is running into a reality check. So what’s happening?
The bill is getting bigger, but where are the returns?
Alphabet became the latest casualty after its third-quarter results disappointed investors. Its shares fell more than 12% on Thursday, their worst single-day percentage decline on record, wiping roughly $500 billion off its market capitalisation. The company’s market value dropped from around $3.97 trillion to $3.46 trillion.The concerns went beyond a quarterly earnings miss. Alphabet reported revenue growth of 25% to $127.6 billion, but its advertising business failed to meet expectations. More significantly, executives acknowledged that Google’s AI Mode was generating lower advertising monetisation than traditional search queries.Chief business officer Philipp Schindler said the strong growth in AI Mode queries had an impact because of the lower monetisation being seen. That admission raised a difficult question: Could Google’s attempt to reinvent search with AI end up undermining the advertising business that finances much of its empire?The pressure is compounded by spending. Alphabet recorded $51.4 billion in capital expenditure in the third quarter alone and reported a second consecutive quarter of negative free cash flow. Microsoft, by comparison, generated $18.6 billion in free cash flow during the quarter despite its AI investments.Amazon has also faced scrutiny. Its shares fell after it offered a cautious sales forecast for the crucial holiday quarter. The company reported negative cash flow of $42 billion, reflecting the scale of its spending. Chief executive Andy Jassy defended the investment, arguing that cloud services, retail and its own chips could unlock enormous future opportunities.Microsoft has fared relatively better. Revenue rose 19% to $92.3 billion, while its cloud business grew 30% to $63 billion. Its results offered investors evidence that enterprise demand for AI remains strong, even as questions persist over where the technology’s long-term value will ultimately accrue.
From chipmakers to China, the sell-off spreads
Intel shares plunged more than 25% in premarket trading on Friday after the chipmaker forecast fourth-quarter revenue of $15 billion-$16 billion, below analysts’ expectations of $17.07 billion. Its finance chief also said the company did not expect positive cash flow this year.The warning dragged semiconductor stocks lower, including Nvidia, AMD, Qualcomm and Broadcom. Server makers Dell, Hewlett Packard Enterprise and Super Micro Computer also fell, showing how the sell-off is spreading across the AI infrastructure supply chain.China’s markets have taken an even harder hit. The CSI300 index fell 8.5% in October, its biggest monthly decline since early 2016, while the technology-focused STAR50 has lost around 40% in less than four months, according to Reuters. The correction has erased roughly $480 billion in market value from Chinese AI and semiconductor leaders.Chinese technology stocks had surged on expectations of strong domestic AI demand and Beijing’s push for technological self-reliance. But high valuations, concerns over export restrictions and questions about future demand have undermined the rally. Some popular stocks, including robotics and chipmaking companies, have lost around half their value.The correction also highlights how heavily AI has come to dominate China’s markets. Goldman Sachs estimates that AI-related stocks account for 42% of market capitalisation and 57% of turnover across mainland-listed and Hong Kong-listed shares.
Investors are asking who can afford the AI race
The scale of the investment explains the growing nervousness. Morgan Stanley expects spending on AI infrastructure to exceed $1 trillion next year. JP Morgan estimates global AI capital expenditure could reach $5.5 trillion by 2030, with $900 billion spent in 2026 alone.Companies are increasingly turning to debt markets to finance the build-out. Meta, Amazon and Alphabet have issued substantial amounts of bonds in recent years, while Microsoft is reportedly planning a $25 billion US investment-grade bond sale. Rising borrowing costs could make this strategy more expensive, particularly if AI revenues fail to keep pace.Investors are already reassessing their exposure. US equity funds recorded net outflows of $6.65 billion in the week ended October 28, their first weekly withdrawals in three weeks, according to LSEG Lipper data.