Three years have passed since OpenAI’s publication of ChatGPT ignited enthusiasm for artificial intelligence. The money is still coming in, but there are also concerns about how long the good times will remain.
The recent sell-off in Nvidia Corp. shares, Oracle Corp.’s collapse after disclosing increased AI spending, and soured mood around a network of firms exposed to OpenAI are all evidence of growing pessimism. Looking ahead to 2026, investors are debating whether to reduce their exposure to AI in anticipation of a potential bubble burst or to double down to profit on the game-changing technology.
“We’re in the phase of the cycle where the rubber meets the road,” said Jim Morrow, CEO of Callodine Capital Management. Although the story has been positive, at this point we’re sort of raising the stakes to see if the returns on investment will be favorable.
Concerns regarding the AI industry include its applications, the high development costs, and whether or not customers would ultimately pay for the services. These responses will have a significant impact on the future of the stock market.
The largest tech companies in the world, including Alphabet Inc. and Microsoft Corp., as well as companies that profit from investing in AI infrastructure, like chipmakers Nvidia and Broadcom Inc. and electricity providers Constellation Energy Corp., have been the main drivers of the Standard & Poor’s 500 index’s three-year, $30 trillion bull run. The equity indices will follow if they cease to rise.
According to Sameer Bhasin, partner of Value Point Capital, “these stocks don’t correct because the growth rate goes down.” “When the growth rate stops accelerating, these stocks correct.”
Of all, there are still many reasons to be optimistic. The tech behemoths that make up the majority of AI investment have enormous resources and have promised to continue making large sums of money in the coming years. Additionally, companies that create AI services, like Alphabet’s Google, are improving with new models. Thus, the controversy.
Here are some of the main themes to keep an eye out for as you navigate these choppy waters.
Access to Capital
In the upcoming years, OpenAI alone intends to invest $1.4 trillion. However, the Sam Altman-led business is making far less money than its operational expenses, despite becoming the most valuable startup in the world in October. The Information stated in September that it anticipates spending $115 billion through 2029 before turning a profit in 2030.
Earlier this year, the business raised $40 billion from Softbank Group Corp. and other investors without any issues. Concerns about circular funding in the AI sector have been raised by Nvidia’s vow to spend up to $100 billion in September, one of several agreements the chipmaker has made that transfer money to its clients.
If investors become reluctant to provide further funds, OpenAI may face difficulties. And the businesses in its orbit, including computer services provider CoreWeave Inc., would suffer greatly as a result.
According to Eric Clark, portfolio manager at the Rational Dynamic Brands Fund, “if you think about how much money—it’s in the trillions now—is crammed into a small group of themes and names, when the first hint of that theme even having short-term issues or just valuations get so stretched they can’t possibly continue to grow like that, they’re all leaving at once.”
Many other businesses rely on outside financing to accomplish their AI goals. Oracle’s stock skyrocketed as it accumulated reservations for cloud computing services. However, constructing such data centers would need enormous sums of money, which the firm has raised by selling bonds worth tens of billions of dollars. Using debt puts pressure on a business because, in contrast to equity investors, who primarily profit when share prices increase, bondholders must be paid in cash on a schedule.
Oracle revealed far greater capital expenditures than anticipated in its fiscal second quarter, and cloud sales growth fell short of the average analyst projection, which caused the company’s shares to plummet on Thursday. Oracle’s stock fell even further on Friday when it was revealed that several of the data center projects it is working on for OpenAI have been delayed. This news also affected other stocks that are vulnerable to AI infrastructure. A measure of Oracle’s credit risk, meanwhile, reached its highest point since 2009.
According to a statement from an Oracle representative, the business is still confident in its capacity to fulfill its commitments and pursue its expansion goals.
According to Kim Forrest, chief investment officer of Bokeh Capital Partners, “the credit people are smarter than the equity people, or at least they’re worried about the right thing—getting their money back.”
Big Tech spending
In the upcoming year, it is anticipated that Alphabet, Microsoft, Amazon.com Inc., and Meta Platforms Inc. would spend over $400 billion on capital expenditures, the majority of which will go into data centers. Even if those organizations are experiencing an increase in income from cloud computing and advertising, it is far less than the expenses they are facing.
According to Michael O’Rourke, chief market strategist at Jonestrading, “any plateauing of growth projections or decelerations will wind up in a situation where the market says, ‘OK, there’s an issue here.”
According to statistics provided by Bloomberg Intelligence, earnings growth for the Magnificent Seven tech giants—which also include Apple Inc., Nvidia, and Tesla Inc.—is expected to be 18% in 2026, the slowest in four years and marginally better than the S&P 500.
One of the main concerns is growing depreciation costs due to the data center binge. In the last quarter of 2023, Alphabet, Microsoft, and Meta together incurred depreciation expenses of almost $10 billion. In the quarter that ended in September, the amount increased to about $22 billion. And by this time next year, it is anticipated to reach almost $30 billion.
All of this may put pressure on dividends and buybacks, which give investors their money back. According to statistics gathered by Bloomberg Intelligence, Meta and Microsoft are predicted to have negative free cash flow in 2026 after taking shareholder returns into account, while Alphabet is predicted to break even.
The strategic change that all of the spending reflects may be the main cause for concern. The capacity of Big Tech businesses to produce rapid revenue growth at cheap costs, leading to enormous free cash flows, has long been the foundation of their value. However, their AI ambitions have completely reversed that.
O’Rourke stated, “Multiples are going to contract if we continue down the track of levering up our company to build out in the hopes that we can monetize this.” “This entire shift would have been a grave error if things didn’t work out for you.”
Rational exuberance
Even if Big Tech’s values are high, they are by no means outrageous when compared to other times of market enthusiasm. It’s common to draw comparisons between AI and the dot-com crash, but the scope of AI’s benefits differs greatly from what occurred during the internet’s development. For instance, according to statistics provided by Bloomberg, the tech-heavy Nasdaq 100 index is valued at 26 times predicted earnings. At the peak of the dot-com bubble, that number was more than 80 times.
Due in part to the length of time the stocks had been trading, as well as the fact that the firms were younger and less lucrative, if they made any at all, valuations during the dot-com era were far higher than they are now.
“These aren’t dot-com multiples,” stated Tony DeSpirito, BlackRock’s global chief investment officer and portfolio manager for fundamental stocks. “This is not to say there aren’t pockets of irrational exuberance or speculation, because there are, but I don’t think that exuberance is in the Mag 7’s AI-related names.”
One of the AI stocks with nosebleed values is Palantir Technologies Inc., which trades at a ratio of more than 180 times expected earnings. Another company with a multiple of over 140 times anticipated profits is Snowflake Inc. However, given all the excitement around them, Nvidia, Alphabet, and Microsoft are all below 30 times, which is really tame.
This puts investors in a difficult situation. Indeed, even as investors continue to pour money into AI stocks, the risks are clearly visible. However, most businesses aren’t now valued at levels that would cause panic. Which way the AI trade will go from here is the question.
Bhasin of Value Point stated, “This kind of group thinking is going to crack.” It’s unlikely to crash as it did in 2000. However, there will be a rotation.
