How much AI spending is too much? Investors are starting to wonder
The S&P 500 and Nasdaq have their biggest one-day drops in weeks after Big Tech companies lay out 2026 AI spending plans.
The artificial-intelligence trade is starting to make investors nervous.
Stocks stumbled Tuesday, with the S&P 500 and Nasdaq composite notching their biggest drop in weeks. Wall Street’s fear gauge, the VIX index of stock volatility, jumped.
The major stock indexes rallied in April in part on optimism over the AI boom, and still aren’t far from their record highs. But in recent days, investors have appeared to flinch at news that Meta, Alphabet, Microsoft and Amazon.com all intend to spend even more in 2026 on their AI build-outs.
“It’s a very big bet and I think the market is starting to treat it like a very big bet," said Jason Pride, chief of investment strategy and research at Glenmede. “Until you get to a point where investors can confirm that the magnitude of the expenditures is justified by future revenues, we will probably see a lot of volatility in these stocks."
The Nasdaq fell 2%, while the S&P 500 dropped 1.2%. The Dow Jones Industrial Average fell 0.5% to close at 47085.2.
Speaking in Hong Kong on Tuesday, Morgan Stanley Chief Executive Ted Pick joined other finance bosses in warning the winning streak has made stocks vulnerable to a pullback. Among the risks: Trade tensions, bubble worries and trouble in credit markets.
Geopolitical tensions and government debt levels are also weighing on investors, said Altaf Kassam, State Street Investment Management’s Europe head of investment strategy and research. Such risks took a back seat during earnings season, he said.
Palantir’s stock dropped, despite the data-analytics company reporting another quarter of record revenue.
“The market did well [Monday] and then all of a sudden things fell apart," said Sam Stovall, chief investment strategist at CFRA Research. “I guess investors are wondering, ‘How long do we hold on to this?’"
Tech stocks had driven much of the gains of the past 10 days as investors digested earnings reports. The Roundhill Magnificent Seven ETF, which tracks Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla, has gained 5.2% over that period. On Tuesday it fell 2.3%. Jay Hatfield, chief executive at Infrastructure Capital Advisors, said it is common to see investors sell some tech as earnings season wraps up to buy stock in other appealing companies.
Investors have also been unsettled by indications that the Federal Reserve might not cut interest rates again next month. On Monday, Fed governor Lisa Cook described the central bank’s December meeting as “live." Two other officials, Mary Daly and Austan Goolsbee, said they had open minds as they weigh a slowing labor market against above-target inflation.
Ten-year Treasury prices rose and yields fell to 4.09% from 4.106% Monday.
The Stoxx Europe 600 lost less than 1%, while Japan’s Nikkei 225 dropped 1.7%. The WSJ Dollar Index edged up.
Write to Heather Gillers at heather.gillers@wsj.com
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