Nasdaq 100 cracks 5%, faces $2 trillion wipeout in October as AI spending fears deepen

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Reuters

The index has declined more than 5.8% so far in October as enthusiasm around AI investments has weakened. Major cloud infrastructure providers, including Meta Platforms, Alphabet and Amazon.com, have further increased their spending projections as they compete to expand their AI infrastructure.

The loss would be slightly higher than the entire market capitalisation of SpaceX.

The prospect of continuously rising AI investments has unsettled investors, particularly as higher borrowing costs threaten to make debt-funded projects more expensive and difficult to justify.

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Alphabet recorded its steepest single-day percentage decline on Thursday after reporting disappointing performance in its core search advertising business and a sharp increase in cash outflows.

Meanwhile, Meta's proposed record $97.5 billion capital raise has fuelled concerns about potential shareholder dilution and whether increasing AI expenditure could push other major technology companies to rely more heavily on capital markets.

Microsoft and SpaceX offered some relief from the broader market weakness, with results suggesting that investments in AI are beginning to generate returns.

Microsoft is reportedly preparing to raise approximately $25 billion through its first US investment-grade bond offering in more than nine years. Other major technology companies, including Meta, Amazon and Alphabet, have collectively issued hundreds of billions of dollars in bonds over the past four years. This growing dependence on debt financing has raised concerns among investors.

Morgan Stanley estimates that total capital expenditure on AI infrastructure will exceed $1 trillion next year.

"It may be that we've overestimated how strong the growth might be, but they're not going negative in aggregate," said John Bilton, global head of strategic research at Multi-Asset Solutions. "We have an insatiable and growing demand for data."

AI debt spending risk

The increasing reliance of AI companies on debt financing is emerging as another significant investment risk, challenging the perception that leading companies in the AI boom are largely protected from broader economic pressures.

These concerns are also spreading beyond equity markets into credit markets. Investors are increasingly considering the possibility that higher borrowing costs, combined with slower-than-expected returns from AI investments, could put pressure on companies previously considered relatively insulated from economic uncertainties.

Since the launch of ChatGPT in 2022, revenue growth across the Magnificent Seven technology companies has remained strong, reflecting robust demand for their products and services. This growth may explain why investors initially supported their massive spending commitments despite uncertainty over when these investments would deliver meaningful returns.

Amazon Web Services (AWS), the company's major cloud computing business, continued to record accelerating growth. Meta reported better-than-expected revenue growth and provided an optimistic outlook, while Microsoft also projected strong expansion in its cloud business in its latest earnings announcement.

Historically, major technology companies have invested heavily in infrastructure to expand businesses such as cloud computing, digital advertising and e-commerce. However, the AI boom has pushed capital expenditure to unprecedented levels.

J.P. Morgan estimates that global AI infrastructure spending could reach $5.5 trillion by 2030, with approximately $900 billion expected to be invested in 2026 alone.

According to J.P. Morgan analysts, the combined AI capital expenditure of Amazon, Alphabet, Meta, Oracle and Microsoft this year could be equivalent to their total cumulative spending since ChatGPT was launched in November 2022.