Enthusiasm for artificial intelligence (AI), which propelled the stock market to record highs just a month ago, is beginning to wane. Information technology was the worst-performing sector on the S&P 500 last week, dropping 1.6%, while the Nasdaq 100, primarily featuring technology companies, fell by 4.1%.
The main culprit behind this decline was semiconductor stocks. The Philadelphia Semiconductor Index plunged more than 10% for its worst week since April 2025.
Even SpaceX couldn't escape the downturn, with its shares plummeting 15% last week following a 10% drop the previous week, losing $1 trillion in market value since their peak.
For the SOX index, which rose 65% by 2026, a 20% decline since last month's peak has brought it to the technical threshold of a bear market. The index has experienced sharp volatility, with moves exceeding 2% in all but two sessions over the past four weeks.
Wall Street is questioning the sustainability of gains in memory and storage stocks, dominating the S&P 500 leaders this year, as increasing demand from data center developers leads to shortages and sharp price increases. SanDisk, best performer of the S&P 500 in 2026, dropped 29% last week, while Micron Technology, third-best performer, decreased 13%.
Rising Doubts
According to a Bloomberg report seen by Sky News Arabia's Economy section, with increasing scrutiny over the billions invested in AI-linked data centers, investors are set to closely examine major companies' earnings reports. Starting this week with Tesla and Alphabet, the scrutiny continues with Microsoft, Meta Platforms, Apple, and Amazon next week, seeking signs of higher AI investment returns.
Together, these six companies represent a quarter of the S&P 500 market value, with Nvidia publishing its results later next month.
Declining Valuations
Overall, big tech valuations have recently taken a hit. The Bloomberg Magnificent 7 index is trading at 24 times projected earnings over the next 12 months, down from 33 times last October and 29 times at the start of 2026.
Amid growing investor caution over heavy AI spending, Apple stands out by opting against massive capital investments in favor of partnerships with AI service providers, making it one of this year's best-performing large companies, gaining 23%.
Calls for Caution
Olmespring Global Investments' Portfolio Manager Jake Seltz says investors are more cautious with high AI spending rates, fearing an investment bubble, prompting demands for rapid revenue growth to justify these substantial investments.
Todd Ahlsteen, Chief Investment Officer at Parnassus Investments, notes earnings uncertainty makes high stock earning multiples implausible, with investors focusing more closely on cloud computing margins, pricing, and AI revenue per computing dollar.
Ahlsteen warns that some stocks, especially in AI infrastructure, seem overvalued.
A Bloomberg report quotes Brook Campbell, Chief Research Officer at BNY Newton Investments, highlighting an anxious market atmosphere, with debates on AI spending's duration and scale.
An Optimistic Outlook
Despite spending concerns, Seltz from Olmespring bets AI spending will grow, as computing services demand outstrips supply, boosting major tech companies' revenue and lifting AI infrastructure stocks, citing potential temporary stock price drops as investment opportunities.
Seltz predicts a two-year period of high returns amidst occasional market volatility.
A Highly Sensitive Period
Michael Slyby, Chief Markets Analyst at FXPro, tells Sky News Arabia that Wall Street has entered a highly sensitive phase, shifting from "expectation betting" to "data-based adjudication," predicting daily volatility waves instead of a clear market trend.
Slyby explains that markets are under intense pressure, where any subtle signal or precise earnings report information could trigger stock movements up or down, stressing that in this environment, minor positive numbers could be treated as negative results, with companies failing to show direct AI investment returns swiftly punished by investors.
Liquidity Caution
Slyby highlights that this behavior indicates two things: short-term, cautious market liquidity seeks profit protection, and tech's massive market cap now requires continuous positive news to maintain price levels, preparing investors for waves of daily volatility, with each company's earnings acting as a localized market jolt.
Investor Options
Slyby expects an unusual Wall Street phenomenon, where some tech stocks might jump 5% or 10% post-session on positive news, only to lose gains in the following session due to small margin details or growth slowdowns, leaving investors to choose between enduring daily volatility as a natural transitional phase fee or re-hedging and scaling back trading positions until quarterly earnings and institutional liquidity trends clarify.
A New Phase on Wall Street
Economic analyst and writer Joseph Farha, in an interview with Sky News Arabia, mentions that the market is naturally transitioning. For two years, investor focus was on AI-linked high spending as a future growth indicator, whereas today's priority has shifted to assessing whether this spending can translate into sustainable revenues and profit.
Farha adds that major tech companies have entered a more complex phase requiring proof that current investment cycles will gradually impact profit margins, not just revenue growth, as investors know the current capital spending can't continue indefinitely without clear financial results, prompting markets to reassess companies more conservatively for any slowdown in returns.
Conditional Optimism
Farha points out the real challenge lies beyond a single fiscal quarter’s results. It’s the management’s ability to convince investors that AI services demand will remain robust for years and that significant data center and chip investments won’t exceed market needs. History shows every major investment cycle faces a phase where spending precedes returns, but the difference between success and failure rests on the duration of this phase and companies' ability to finance it without affecting profitability.
Farha concludes that upcoming months may see more selective market movements, with investors distinguishing capable AI revenue-generating companies from those relying on future promises, maintaining that AI optimism persists but has become more realistic, signaling possibly extended volatility until the genuine economic return from these investments becomes evident.