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US tech stocks took a beating in October. From higher interest rates to artificial intelligence (AI) spending concerns, America’s stock market entered November pretty bruised. Despite the decline, everything is up over the year, but how much longer can US stocks sustain their gains? It all depends on the AI trade.
Stock Market Weighs AI Updates
The Nasdaq Composite Index, a leading benchmark dominated by technology companies, posted its worst month in more than a year in October. The broad-market S&P 500, another index that is driven by a substantial number of tech firms, also sank last month.
The one index that survived the turmoil? The Dow Jones Industrial Average. Nicknamed by market analysts as “your grandpa’s stock market index,” the Dow Jones is made up of 30 large, publicly traded companies. These are brands you’ll see walking through a grocery aisle or strutting down the street, whether it's Coca-Cola, Disney, or Walmart.
Investors waved goodbye to tech stocks, at least momentarily, and moved their money into old-stock companies. In other words, they shielded their money from the river of red ink that swept through the AI-fueled tech trade.
Traders also fell in love with US Treasury bonds again. After surging to their highest levels since the global financial crisis two decades ago, yields came down sharply. The benchmark ten-year Treasury yield is now below 5%.
So, why are traders souring on tech anyway? Well, institutional and armchair investors are losing sleep at night for many reasons.
AI Spending Spree
Over the last few years, everyone has been optimistic about AI. Today? That excitement could be fading.
A growing worry that is making everyone furrow their brows is the running tab.
This year, the leading AI giants – Alphabet, Amazon, Microsoft, and Oracle, for example – are spending up to $1 trillion on building AI infrastructure, from data centers to chips. Based on the latest earnings reports, they will continue to spend and may even increase their appetite to invest a lot of cash next year.
Anthropic, the maker of Claude, said in its updated filing on Nov. 2 that it has almost $900 billion in long-term spending commitments.
In previous years, Microsoft and Nvidia used their strong cash stockpiles to fund the buildout. In recent months, these companies have turned to debt to keep the party going.
At a time when interest rates are edging higher, Big Tech could be hurting their balance sheets. Investors are seeking higher compensation to lend money to these firms. But the industry expects even greater returns in the coming years.
Concerns about AI spending have driven much of the recent selloff, along with higher interest rates and disappointing earnings results.
Another Dot-Com Crash?
Market watchers are split on whether today’s market conditions resemble what happened during the dot-com bubble in the late 1990s and early 2000s.
For those who were not around at the time, any company that added a “.com” to its name saw its stock rocket: Pets.com, eToys.com, Boo.com, and Webvan.com. These stocks surged without any revenue or a sound business model. But investors were too excited to care about the basics.
Eventually, the dot-com crash happened in multiple stages, and hundreds of companies went bankrupt. Some of today’s biggest names, such as Amazon and Nvidia, survived.
The difference between then and now, however, is that many of today’s tech companies generate real revenue and post exceptional profits. Despite how much they spend, they post solid earnings, as shown in the third-quarter earnings reports.
Plus, approximately $7 trillion is sitting on the sidelines, waiting for John Smith and Jane Doe to buy the dip.
Why This Matters
The US stock market has been the only constant amid all the volatility since the pandemic. Whether it's inflation or wars, stocks have gone up and shrugged off all the bad news. If an ocean of red ink floods the New York Stock Exchange, it could ripple through the economy and create more than just a bad headache.
4 Questions
The story, in brief
Why did US tech stocks fall in October?
US tech stocks fell as investors worried about higher interest rates, heavy artificial intelligence spending, and disappointing earnings results. Concerns about the cost of building AI infrastructure also added pressure. Many investors moved money out of tech stocks and into older large companies and US Treasury bonds.
How much are major tech companies spending on AI infrastructure?
Leading AI companies such as Alphabet, Amazon, Microsoft, and Oracle are spending up to $1 trillion this year on AI infrastructure. That includes data centers and chips. Based on recent earnings reports, they plan to keep spending and may increase those investments next year.
Does the AI stock selloff look like the dot-com crash?
Market watchers are divided on whether current conditions resemble the dot-com bubble. The key difference is that many of today’s tech companies have real revenue and strong profits, unlike many dot-com firms that surged without sound business models. Recent third-quarter earnings reports showed solid results despite high spending.
What could happen if the US stock market keeps sliding?
The US stock market has remained strong through inflation, wars, and other volatility since the pandemic. If a deep wave of losses hits the New York Stock Exchange, the effects could spread beyond investors. The decline could ripple through the broader economy and cause more than a temporary setback.
