Is the AI investment boom losing steam? What is driving the sell-off

Global AI investment boom faces growing scrutiny as technology stocks slide and investors question whether heavy spending on AI infrastructure will deliver expected returns

The global artificial intelligence (AI) investment boom is facing growing pressure as tech stocks slide and credit risks rise. Disappointing earnings from major technology companies, mounting data centre expenditure and uncertainty over returns from AI investments have made investors more cautious about the sector.

 

The Nasdaq 100 fell 3.5 per cent on Friday, October 30, taking its October decline to 6.7 per cent, its worst monthly performance since March 2025, according to Bloomberg. The S&P 500 declined 1.8 per cent. The sell-off was visible on Asian markets. South Korea's benchmark Kospi fell 3.48 per cent to close at 5,730.74, and Japan's Nikkei 225 dropped 2.1 per cent. In Europe, the STOXX Europe 600 Technology index fell 2.75 per cent.  

The selloff followed quarterly results from major technology companies, which showed that rising AI investments are putting pressure on cash flows even as demand for cloud computing remains strong.

 

Big Tech earnings raise concerns

Alphabet shares fell 13 per cent on Thursday, their biggest single-day decline, after its results showed weaker-than-expected revenue from its core search business and a second consecutive quarter of negative free cash flow.

 

Amazon shares declined 5.6 per cent over Thursday and Friday after reporting a larger-than-expected free cash flow deficit. Higher capital expenditure and slower growth in its e-commerce business have added to investor concerns.

 

The pressure further extended to chipmakers. Intel shares fell 29 per cent after issuing a revenue forecast below analysts' estimates, while Nvidia and Advanced Micro Devices declined 4.2 per cent and 11 per cent, respectively.

 

Investors are increasingly assessing whether companies can generate sufficient returns from their AI investments.

 

Anthony Saglimbene, chief market strategist at Ameriprise, told Bloomberg: "It is all going to come down to, what are companies spending, how much are they getting back, and how deep are their moats, such that they can continue growing revenue."

Rising expenditure weighs on cash flows

Three of the four major hyperscalers - Amazon, Meta Platforms and Alphabet - reported negative free cash flow in the latest quarter. Amazon's deficit reached nearly $35 billion, compared with positive free cash flow of $430 million a year earlier. Microsoft reported positive free cash flow of $18.6 billion.

 

Meanwhile, Meta's future spending commitments rose to $825 billion, while Alphabet's exceeded $1 trillion.

 

The scale of these investments has raised questions about how quickly companies can monetise their AI infrastructure.

 

Saglimbene told Bloomberg that technology companies had moved from asset-light business models to asset-heavy operations, changing their cash flow profiles and how investors should value them.

AI-linked credit risks increase

Concerns have also spread to credit markets. The cost of protecting against potential defaults on technology companies' debt has increased.

 

According to Bloomberg, five-year credit default swaps (CDS) linked to Broadcom rose to 175.4 basis points, their highest closing level on record. The corresponding measure for SpaceX increased to 266.5 basis points, its highest since trading began earlier this year. Alphabet's CDS also rose to around 84 basis points.

 

CDS are financial contracts that allow investors to hedge against the risk of a borrower defaulting. Rising premiums indicate that investors are demanding greater compensation to take on credit risk.

 

Trading volumes in CDS linked to the 10 largest hyperscalers and chipmakers rose more than eightfold in 2026 to $176 billion through the previous week, Barclays credit strategist Jigar Patel told Bloomberg.

 

The pressure comes as technology companies continue to rely on borrowing and long-term financing commitments to fund data centre expansion.

 

Earlier this year, a Nikkei Asia study estimated that the combined off-balance-sheet commitments of Alphabet, Microsoft, Amazon, Meta and Oracle had risen eightfold in about four years to $1.65 trillion. This compared with around $1.35 trillion in reported balance-sheet debt.

 

These commitments largely relate to data centre leases and agreements to procure computing equipment.

Valuations is another major concern for investors

Concerns over high valuations have added to the pressure on AI-linked stocks.

 

At the Business Standard BFSI Insight Summit held last week in Mumbai, a panel of fund managers cautioned that AI investments would need to generate measurable economic returns to justify market expectations.

 

Sankaran Naren, executive director and chief investment officer at ICICI Prudential AMC, said: "The problem is not that AI is real. It is just an implied growth assumption model of investing, which is a problem."

 

European Central Bank, in a blog post in August, also examined the possibility of a correction in technology stock valuations. "We argue that economic research on past technological revolutions points to a worrisome conclusion: a correction of current stock market valuations is likely," it read.

 

They added that the timing of such a correction was difficult to predict.

Is the AI boom entering a downturn?

Notably, cloud demand have remained strong, and technology companies continue to commit substantial capital to infrastructure.

 

However, weaker performance in some core businesses, negative free cash flow, rising credit protection costs and large financing commitments have increased scrutiny of the sector.

 

Investors are now weighing whether the returns from AI will justify the billions of dollars companies are committing to data centres, chips and other infrastructure.