Tech stock sell-off may herald the long-awaited AI reckoning

• A reckoning is coming for the artificial intelligence boom.
• Tech stocks have enjoyed huge rallies this year but now face an aggressive sell-off.

Artificial intelligence has made fortunes for companies and investors this year. A violent correction is now triggering a reckoning.

Tech companies at the heart of the AI boom are facing a devastating sell-off as investor panic over the possibility of a US recession is leading global markets into a major correction — while leaving this year's most hyped trades among the hardest hit.

On Monday, tech giants including Nvidia, Apple, and Microsoft, faced big falls in pre-market trading, with Jensen Huang's AI chip firm down more than 13%, while the iPhone maker down more than 9% ahead of the bell.

Apple's fortunes will not have been helped by Warren Buffett's Berkshire Hathaway disclosing over the weekend that it had offloaded almost half its stake in Apple in the second quarter.

The tech slide follows a dramatic sell-off in Asia, with Japan's main stock market index, the Nikkei 225, ending 12.4% lower and other AI heavyweights such as SoftBank slid hard. Monday's falls come after a week in which the spell of AI showed serious signs of breaking.

As Google kicked off Big Tech's earnings season at the end of July, company after company struggled to convince investors that mammoth spending on the expensive chips and data centers needed to sustain their AI ambitions would deliver returns anytime soon.

Google CEO Sundar Pichai struggled to offer a direct answer about returns as the company noted capital expenditure in the quarter had grown to $13 billion, up from $6.9 billion in the same period a year earlier.

Meta's chief financial officer, Susan Li, told investors to expect "significant capex growth" in 2025. By the end of the year, the company expects to spend up to $40 billion on AI research and product development.

Microsoft forecast AI monetization in "the next 15 years and beyond." The sell-off shows how investors who were hoping for monetization somewhat sooner than that are feeling. Its shares dipped more than 5% in pre-market trading.

Investors have, of course, been aware for some time of the heavy spending being taken on by tech giants in the name of AI, and been willing to put up with it. That's because AI's been touted as a technology as revolutionary as the internet and smartphones by tech luminaries like Bill Gates.

Delivering returns

But for some time now, there have been growing concerns that the technology's ability to deliver on the hype has been a tad overestimated.

Goldman Sachs published some probing research toward the end of June that posed the question investors have spent the past week doubling down on during earnings calls: "Too much spend, too little benefit?"

Its conclusions were at odds with what Silicon Valley CEOs spent much of last week telling investors.

Jim Covello, Goldman's head of global equity research, suggested AI "must be able to solve complex problems" to "earn an adequate return" on the roughly $1 trillion needed to develop and run it. In his view, in vogue, generative models simply aren't built to do that.

Daron Acemoglu, an MIT professor and economist the bank interviewed as part of the research, also sounded skeptical, with his prediction that AI will affect fewer than 5% of all tasks.

Nvidia, which briefly became the world's most valuable company thanks to nonstop demand for the chips it supplies to AI model makers, won't report earnings until the end of August. Yet it's found itself unable to escape the panic spreading in the markets.

'Overhyped'

The chip company showed its first major sign of weakness last week after The Information reported that a design flaw would delay the production of its newest chip, the Blackwell B200, by at least three months. That's bad news for Meta, Google, and Microsoft, the report said, which have put in huge orders for the powerful new chip.

Meanwhile, hedge fund Elliott Management has been busy telling investors that Nvidia is "overhyped," the Financial Times reported on Friday.

If others really start to believe that's the case, it could mark the beginning of the end for the AI rally.

However, some remain hopeful that it's just a passing phase. In a research note on Monday, Wedbush analyst Dan Ives wrote that despite investors "feeling massive pain globally," his message to those wondering if this "tech bull market and historic run for tech stocks is over" was clear: "It's NOT in our view and this is just a white knuckle moment in a multi-year bull run for tech stocks that need hand-holding."

On its current trajectory, though, AI hype looks ready to make a violent return to reality. Investors better brace themselves for the full force of the landing.