Big Tech's AI spending spree puts over $2 trillion in Nasdaq market value at risk

Over $2 trillion in market value is at risk for the tech-heavy Nasdaq 100 this month as investors question whether massive AI investments will pay off quickly enough. The possible loss would even be higher than SpaceX's entire market value. The index has already fallen more than 5.8% in October as concerns over the AI boom have weighed on technology stocks. The latest earnings reports from major companies have added to these worries, with Meta Platforms, Alphabet and Amazon.com raising their spending forecasts further as they expand their AI infrastructure. Investors are increasingly concerned about the rising cost of these investments and how long companies will take to recover the money spent. Higher borrowing costs are adding to the pressure, making debt-funded investments more expensive. With Apple set to announce its results next week and AI bellwether Nvidia due to report in mid-November, investors are watching how the biggest technology companies are performing and whether their AI investments are beginning to pay off.

The latest earnings reports have added to the pressure on technology stocks. Alphabet recorded its biggest one-day percentage fall on record on Thursday after its results disappointed investors in its core search advertising business and showed a sharp increase in cash burn. Meta's plans to raise a record $97.5 billion have also raised concerns about shareholder dilution and whether other Big Tech companies may increasingly turn to capital markets to fund their growing AI expenses. However, Microsoft and SpaceX have been exceptions to the broader decline, with their results showing that AI investments are beginning to generate returns. "It may be that we've overestimated how strong the growth might be, but they're not going negative in aggregate," John Bilton, global head of strategic research at Multi-Asset Solutions told Reuters. "We have an insatiable and growing demand for data."

The growing cost of AI investments is also bringing the borrowing plans of technology companies under scrutiny. Microsoft is reportedly planning to raise around $25 billion through its first US investment-grade bond sale in more than nine years. Other major technology companies have also borrowed heavily. Meta, Amazon and Alphabet have issued hundreds of billions of dollars in bonds over the past four years. This has raised concerns about their increasing dependence on debt to fund their investments. Rising borrowing costs could make it more expensive for these companies to raise money, particularly if the returns from AI investments take longer to come through. Morgan Stanley expects overall spending on AI infrastructure to cross $1 trillion next year. The growing dependence of AI companies on borrowed money is emerging as another risk for investors. It is also raising questions about whether companies at the centre of the AI boom can remain protected from wider economic pressures. The concerns are now spreading beyond stock markets to credit markets. Investors are beginning to consider the possibility that higher borrowing costs and slower returns from AI investments could put pressure on companies that were previously seen as relatively insulated from such risks.

Despite concerns about the rising cost of AI investments, revenue across the "Magnificent Seven" has remained strong since ChatGPT was launched in 2022. Strong business performance and demand may explain why investors were initially willing to support the companies' rising spending, even though it remains uncertain when these investments will deliver returns. Amazon Web Services, the company's cloud computing business, continued to see faster growth. Meta reported better-than-expected revenue growth and gave an upbeat outlook. Microsoft also forecast strong growth in its cloud business in its latest earnings report.

Big Tech companies have traditionally spent heavily on infrastructure to expand their cloud computing, online advertising and e-commerce businesses. However, the AI boom has pushed their spending to much higher levels. J.P. Morgan expects global spending on AI infrastructure to reach $5.5 trillion by 2030, with $900 billion expected to be spent in 2026 alone. The scale of this year's investments is particularly significant. J.P. Morgan analysts noted that the combined AI spending of Amazon, Alphabet, Meta, Oracle and Microsoft this year would likely equal the total amount they have spent since ChatGPT's launch in November 2022.