There have been dramatic sell-offs in the technology sector as investors have started to fret about the durability of AI spending.
- Hyperscalers have spooked the market on spending
- AI infrastructure groups have seen leveraged trades unwind
- SK Hynix saw its shares drop more than 20% in a day
The past week has been characterised by an abrupt and significant weakness in the technology sector. There appear to be two problems at work: the hyperscalers have spooked the market because they are spending too much, while the beneficiaries of that spending are struggling from an over-valuation problem. The result has been an uncomfortable ride for investors.
For the hyperscalers, the problem started with Alphabet. While the group exceeded earnings expectations and its cloud spending appeared to have started to pay off, it reported negative free cash flow, which troubled markets. It also raised its capital expenditure forecast for 2026 from $195 billion to $205 billion and warned of even higher spending in 2027. Markets were nonplussed and the shares sold off.
It was a similar picture for Meta and Microsoft. Investors were unimpressed with Mark Zuckerberg’s promise of personalised bots, focusing instead on the group’s rising expenses. Shares sold off in the aftermath of its results. Microsoft reported higher-than-expected revenue growth forecasts, which cushioned the impact of its spending plans. It signed more than $130bn of new data centre leases in the second quarter.
The one group for which this should be good news is the AI infrastructure groups. If the hyperscalers are spending excessively, semiconductors and memory groups should be beneficiaries. However, they have sold off as well. The trigger here appears to be South Korea chipmaker SK Hynix’s slightly disappointing results – though it still reported a six-fold jump in profit.
The sell-off has exposed the amount of leverage and hot money in the semiconductor trade. The swings in Asian markets in particular have been extreme. SK Hynix saw its shares drop more than 20% in a day. The South Korean KOSPI dropped 12% on 29 July. The volatility prompted an apology from South Korea’s finance minister Koo Yun-cheol for introducing single-stock leveraged ETFs, saying they had not been considered carefully enough. It is notable that the US-listed shares of SK Hynix fell far less.
The AI trade has had bubble-like qualities for some time. Investors have got carried away with the growth story and neglected the valuation part. The AI phenomenon appears to be real and substantial, and there may even be opportunities in this rout, but a period of sober reflection of valuations and spending is probably overdue.
