A tech sell-off shook global markets on Tuesday as attention turned away from developments in the US war with Iran and toward the future of AI companies and chipmakers that have driven stock markets to record highs.
The tech-heavy Nasdaq index opened 2% lower on Tuesday. The Dow and S&P 500 were also down at opening.
All three major US indices have hit record highs this year, riding off a rush of funding to support AI technology and infrastructure. Nasdaq is up 10% for the year, while the Dow jumped 6% so far this year, breaching past 51,000 points, and the S&P 500 is up 7.3%.
But some economists have warned that the influx of AI spending is a bubble reminiscent of the dot-com bubble that burst in the early 2000s. Seven tech companies make up 30% of the S&P 500’s value.
The heavy reliance on a single industry and a few key companies has some investors wondering if it’s a matter of when, not if, there will be a burst. Those concerns have been heightened by signals from the Federal Reserve last week that it may increase interest rates, and therefore the cost of borrowing, in order to tackle rising inflation.
Those looking for signs of stumbling may have found confirmation after a series of developments on Monday. The stock market drop started when Google-parent, Alphabet, had its worst day on the market in over a year. A pair of high-profile AI researchers left the company last week, worrying investors. Alphabet’s share price had dropped 5% by closing Monday.
Elon Musk’s SpaceX, which debuted on the market on 12 June to much fanfare, dropped 16% on Monday as the company’s post-initial public offering (IPO) boost continued to ebb. On Monday, the company announced it is looking to raise $20bn in a bond sale, even after the company gained more than $85bn through its IPO, sparking concerns over the massive cost of the company’s projects.
“SpaceX is not yet part of the Nasdaq indices, but the fact that it is jumping on the bond train to fund excessive AI and infrastructure spending revives earlier concerns that Big Tech may be spending too much on AI infrastructure and increasingly financing that spending through debt,” said Ipek Ozkardeskaya, senior analyst at Swissquote, noting that Morgan Stanley has estimated that AI-related borrowing will surpass $500bn this year
After the US stock market closed for the day on Monday, stocks in Asia appeared shaken by the drops around AI and tech companies. South Korea’s benchmark closed 10% down on Tuesday after the country’s largest chipmakers, SK Hynix and Samsung Electronics, both closed over 12% lower. Japan’s Nikkei 225 was down 3.5% at the close of trading.
