Fears of an AI Investment Bubble Unsettle Global Technology Markets This Week

Synopsis

Technology stocks took a huge hit this past week as investors wonder whether they are getting good value from the artificial intelligence spending and debt financing for data centres. A stock index tracking semiconductors tumbled for seven consecutive sessions, South Korea's KOSPI suffered its biggest daily loss in nearly 8% since June and the Nasdaq had its worst week since June. A dramatic withdrawal of investment in AI could reduce global output by 1.1% by 2028, the IMF said. There are still some opinions out there that say bubble fears are exaggerated.

Technology stocks tumbled around the globe this week as investors considered whether the investment flood in AI will pay off, while the data centres behind the hottest investment theme have become more expensive to finance thanks to rising borrowing costs.

The Nasdaq Composite closed 573 points, or 2.1%, lower to 26,140 on Friday, marking its biggest weekly drop since June. The S&P 500 slipped 1.1% and the Dow 0.3%. It was a day earlier, when Asian markets were hardest hit, with South Korea's KOSPI dropping nearly 8% and Japan's Nikkei 225 down nearly 5%, although Wall Street's major indexes bounced back to end up higher on Thursday.

Debt, rates and competition

The worldwide pullback came after a sharp drop on Wall Street on Wednesday after a robust US inflation report reinforced concerns that higher rates will make funding for AI more expensive, CNN reported. The closely followed index of chip stocks has shed about 20% from a June high, dropping for a seventh consecutive day Thursday.

The concern revolves around borrowing. The core of CoreWeave, which leases out computing power, fell nearly 12% on Friday and nearly 24% in a week as investors looked at the rising debt load. Investors have started to dump bonds secured by some data centres, due to concerns that AI earnings won't necessarily outpace the borrowing, reported NBC News, while worries abound that China's memory-chip production could lead to an oversupply.

“Our children deserve both” is not in this story, rather the words of the market are more guarded. PNC Financial Services Group Chief Investment Officer Amanda Agati said that investors have been “skittish” about the road ahead for AI.

What the IMF has said

Economists at the International Monetary Fund have expressed the danger in macro-economic terms. It risked warning that a significant reduction in investment in AI could reduce global GDP by 1.1% by 2028, and by 1.8% in the United States.

The world economy was “standing on one leg, the AI leg”, said Managing Director Kristalina Georgieva at a Bretton Woods Committee event. According to Invezz, citing a CNBC ranking, twenty top AI and chip companies had lost more than $1 trillion in value in the past week, warning against complacency in the wake of the International Monetary Fund's Global Financial Stability Report.

Beyond just the markets, why it matters

Nearly half of the U.S. economy's growth this year is due to tech-related spending, according to NBC News. It is this link that makes the stock-market "wobble" in one sector a story for policy makers.

A contested picture

Not all analysts interpret moves as the result of a popped bubble. The sell-off is a reflection of cautiousness against the more fragile part of the AI ecosystem, said Rong Ren Goh, portfolio manager at Eastspring Investments. CNN said the worry that a bubble might pop seems to have been greatly exaggerated, and that investors haven't pulled out of markets but have moved their money elsewhere, such as into healthcare and software and government bonds.

Outlook

Inflation and rate signals are likely to be the next tests, as is the pricing of data-centre debt in credit markets, via corporate earnings from the sector. If you want to know whether this week was a week of correction or a turning point, then those readings are the ones you would want to look at – not any one session.