Big tech is failing, economy losing

Has the day of reckoning finally arrived? Wednesday’s rout in tech stocks led by Tesla and Google parent Alphabet wiped a collective $1 trillion in value off U.S. equities, signaling a broad-based correction could be in store.

Losses in the benchmark S&P 500 index and tech-heavy Nasdaq Composite endured their worst days since the fourth quarter of 2022.

Chief among concerns is the fear that spending by the leading cloud computing companies, often called hyperscalers, to win the race in artificial intelligence may have gotten out of control.

“Investors realize that the payoff is going to take time to materialize and the hyperscalers’ earnings are being hurt in the short term by how much they’re spending on it,” Alec Young, chief investment strategist at Mapsignals, told Bloomberg.

Is the AI bubble bursting?

Going into earnings season, fund managers wanted to see some flesh on the bones of the AI euphoria.

Big Tech needed to demonstrate concrete examples of robust corporate profit growth to justify the recent multiple expansion that has stretched valuations to their breaking point.

Even as bulls like Wedbush Securities analyst Dan Ives have argued the AI party is only just beginning, Nicholas Colas of DataTrek Research told Investors Business Daily in a July 12th article that expectations had run well ahead of reality.

Two days later, a would-be assassin narrowly missed killing Republican nominee Donald Trump at a rally, spooking markets.

“Current valuations imply earnings will double, and in some cases double again, at U.S. Big Tech companies,” he said, arguing companies like Tesla were trading more on faith than fundamentals.

Take Tesla, a company trying to rebrand itself as a leader in AI and robotics rather than an EV manufacturer, as a prime example.

It notched its biggest one-day drop since September 2020, plunging 12% after CEO Elon Musk revealed the EV inventory liquidation that drove stronger-than-expected Q2 delivery figures came at the direct expense of margins.

OpenAI reportedly twelve months away from running out of money