Nasdaq faces $2tn wipeout in October as AI spending fears deepen

The tech-heavy Nasdaq 100 index faces a potential $2 trillion loss in market value during October, according to recent market forecasts. The decline stems from investor concern over whether the massive influx of funds into artificial intelligence (AI) can generate profitable returns swiftly enough. This potential wipeout equates to nearly the entire market value of SpaceX. The Nasdaq 100 has already dropped over 5.8% since the start of October, as major players in the AI sector grapple with rising spending forecasts.

Key tech companies such as Meta Platforms, Alphabet, and Amazon.com have escalated their spending on AI infrastructure, fearing they might miss the boat on the latest technological advancements. The prospect of investing even larger sums into AI has unnerved investors, especially with rising borrowing costs making debt-funded investment more expensive and difficult to justify.

Notable earnings from megacap companies have so far indicated a mixed outlook. Alphabet suffered its largest one-day percentage drop on record this week, following disappointing results in its core search advertising business and a substantial increase in cash burn. Meta's plans to raise a record $97.5 billion in new financing further heightened concerns about shareholder dilution and potential difficulties in funding mounting AI spending.

On a more positive note, Microsoft and SpaceX reported results that suggested AI spending may be beginning to yield returns.

John Bilton, global head of strategic research at Multi-Asset Solutions, suggested that the tech industry may have overestimated the pace of AI growth. Both Microsoft and SpaceX have demonstrated that higher AI spending can lead to positive results, but Bilton cautioned that the industry may not be generating exponentially stronger growth than initially projected.

Rising debt levels pose another risk to the AI boom, with tech giants such as Microsoft, Meta, Amazon, and Alphabet having issued hundreds of billions of dollars in bond sales over the past few years. Morgan Stanley predicts that capital spending on AI infrastructure will surpass the $1 trillion mark next year. Concerns about overreliance on debt financing have spread beyond stocks to credit markets, where investors are starting to worry about the potential impact of rising financing costs combined with slower returns from AI spending on company performance.