Nasdaq falls as investors question profits from AI spending

Nasdaq fell on July 24 as investors sold chip stocks on worries that the huge sums pouring into artificial intelligence are not yet translating into enough profit, with the next batch of megacap earnings reports looming as the real test. The slide extended a week of market unease over whether the AI boom is building durable cash flow or just inflating expectations.

The pressure on tech shares had already shown up on July 7, when Nasdaq ended sharply lower as Micron Technology fell 4.7% and Sandisk dropped 7.3%, helping drag the PHLX chip index down 4.65%. That selloff reflected mounting doubts about the sustainability of Wall Street’s AI-driven rally, even after months of enthusiasm around data centers, chips and software tied to the buildout.

Those concerns sharpened on July 22, when Reuters said the biggest U.S. cloud and infrastructure spenders, Microsoft, Alphabet, Amazon, Meta Platforms and Oracle, were beginning to show returns on free cash flow, but still faced heavy pressure from AI investment. Their combined free cash flow was expected to be about $4 billion in the third quarter, likely its lowest level since 2014, when those companies were far smaller and spending far less. Investors have been watching that figure closely because it captures the gap between AI enthusiasm and the hard cash required to support it.

The market mood worsened on July 23, when Wall Street futures eased and then U.S. stocks closed lower after earnings updates from large technology companies revived worries about heavy AI spending. Investors were unimpressed by second-quarter results from Alphabet and Tesla, the first of the Magnificent Seven to report that season, and Nasdaq sank more than 2% that day. The message to the market was blunt: AI investment is no longer being judged only by growth headlines, but by margins, cash generation and guidance.

The tension was already visible in a Reuters market segment last October, which described AI buildout spending as “eyewatering” and noted that Google, Amazon, Meta and Microsoft were planning to spend billions on AI development and data centers. That scale of capital commitment has helped power suppliers and chipmakers, but it has also raised the bar for proof that the spending will earn back its cost. With megacap earnings now in focus, investors are demanding evidence that the AI trade can justify the capital intensity behind it.