Chart - As concerns over AI spending intensify, Nasdaq may face a $2 trillion market cap evaporation in October

Johann M Cherian/Shashwat Chauhan

Reuters, October 30 - This month, the tech-heavy Nasdaq 100 Index is expected to wipe out over $2 trillion in market capitalization, as earnings reports from tech giants intensify investor scrutiny over whether the tens of billions poured into artificial intelligence can generate quick returns.

This evaporated market value is slightly higher than the total market cap of SpaceX. With the AI investment frenzy hitting turbulence, the index .NDX has fallen more than 5.8% so far in October. Meanwhile, mega-cap tech companies Meta Platforms META.O, Alphabet GOOGL.O and Amazon.com AMZN.O further raised their spending forecasts as they race to expand AI infrastructure.

The prospect for ever-growing AI expenditure is unnerving investors, especially as borrowing costs rise, which may lead to higher investment costs for debt-funded spending and harder justification.

Here is a roundup of earnings reports from mega-cap tech companies so far: Apple AAPL.O is set to report next week, while AI bellwether Nvidia NVDA.O will announce mid-November.

Tech stocks plunge

On Thursday, Alphabet saw its stock log the largest single-day decline ever as its core search advertising business disappointed (link)and cash burn accelerated sharply.

Meta plans a record-setting $97.5 billion (link) fundraising, stoking market concerns over shareholder dilution and also raising questions over whether soaring AI spending will force other tech titans to increasingly tap the capital markets.

Microsoft MSFT.O and SpaceX SPCX.O stand out in the weak market, with earnings showing their AI investments are starting to pay off.

"We may have overestimated the strength of growth, but overall these companies are not seeing negative growth," said John Bilton, Head of Global Strategic Research at Multi-Asset Solutions.

"Our demand for data is endless and still rising."

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Mounting debt burden

Microsoft is reportedly planning to raise about $25 billion through its first U.S. investment-grade bond issue in nine years (link). Among other mega-cap tech firms, Meta, Amazon, and Alphabet have issued hundreds of billions in bonds over the past four years, which is raising investor concerns about over-reliance on bonds for funding.

Morgan Stanley forecasts total capital expenditures for AI infrastructure will exceed $1 trillion next year.

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Soaring cost of debt default insurance

Tech companies’ increasing reliance on debt financing for AI is emerging as a new risk for investors, challenging previous views that these core boom-cycle firms could remain immune to macroeconomic pressures.

These worries are spreading from the equity to the credit markets, as investors start pricing in the double whammy of rising financing costs and potentially slower AI returns, which could pressure firms previously seen as relatively insulated.

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Strong revenues

Since the 2022 launch of ChatGPT, revenues of the so-called “Magnificent Seven” haveremained robust — underscoring massive AI demand and perhaps explaining why investors were initially willing to support related spending, even though the timeline for returns was unclear.

Amazon’s crown jewel, Amazon Web Services (AWS), continues to accelerate growth, while Meta delivered above-expectation revenue growth with an optimistic outlook. Microsoft also projected strong cloud growth in its latest earnings.

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Surging capital expenditures

Tech giants have traditionally poured vast sums into infrastructure to build and expand businesses in cloud, online advertising, and e-commerce; but the AI craze has pushed capital spending to dizzying heights.

JPMorgan expects global AI capital expenditure to reach $5.5 trillion by 2030, and hit $900 billion in 2026 alone.

JPMorgan analysts say this year’s AI capex for Amazon, Alphabet, Meta, Oracle, and Microsoft will likely match their total cumulative outlays since ChatGPT launched in November 2022.

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(To assist non-English speakers, Reuters has automatically translated its reports into several other languages. As automated translation may be inaccurate or lack the necessary context, Reuters does not guarantee the accuracy of the automated translation, which is provided solely for reader convenience. Reuters accepts no responsibility for any damage or loss caused by the use of the automated translation feature.)