AI stock rally collapses as investors demand returns on heavy spending

A short-lived rally in artificial-intelligence stocks ended in sharp back-to-back selling last week, with the Nasdaq losing 2 per cent over the five sessions and 5.3 per cent in October. The reversal matters for the AI theme because investors repriced the cost of building out AI infrastructure: earnings from Microsoft, Alphabet and Amazon were read less as a verdict on demand than on whether spending can be financed and justified against returns. CNBC reported that the iShares Semiconductor ETF rose roughly 9 per cent over the first three trading sessions before the rally fizzled.

The mechanism, as described by both outlets, was a collision between high expectations and heavy outlays. CNBC said investors are increasingly prioritising financial discipline and a line of sight to returns on AI investment over aggressive spending. Microsoft's Azure revenue grew 48 per cent with capital spending below expectations, and its shares fell only 0.5 per cent for the week. Alphabet fell roughly 12 per cent on Thursday after missing earnings and revenue expectations, reporting negative free cash flow and drawing concern over its AI investments; it ended the week down 12.6 per cent. Amazon missed expectations and fell 1.4 per cent on Friday. Intel's weak outlook sent its shares down more than 28 per cent on Friday, which NZZ put at 29 per cent; CNBC quoted portfolio director Jeff Marks saying the data-centre story remained "mostly intact" but that the drop in personal-computer CPU demand from high memory costs and execution hiccups was misjudged.

Viewed from Zurich, the NZZ am Sonntag columnist argued the sums do not close over time: AI chips account for about 60 per cent of a modern data centre's investment cost, depreciate within a few years and must be replaced, while power costs and imputed interest of about 10 per cent a year weigh on the calculation. The same columnist attributed recent weakness chiefly to uncertainty ahead of the US midterm elections rather than to the bubble bursting, and expected a rebound within one or two weeks. CNBC, by contrast, noted that central bankers held rates steady but that Fed Chairman Kevin Warsh talked tough on inflation.

CNBC flagged the Fed's December meeting as the next macro test, with expectations of a rate rise still high, a prospect it said exacerbated worries that tech companies may be borrowing too much to keep building out AI. The next dated test for the AI trade named in the sources is Anthropic's flotation, which the NZZ columnist suggested could go well.