AI Boom or Bubble? Big Tech Faces a Test of Trillions in Investment Returns

[Financial News, New York = Reporter Lee Byung-chul] Despite a series of earnings surprises from semiconductor companies that beat market expectations, semiconductor stocks plunged, flashing warning signs across global markets.
The semiconductor sector is believed to have entered a bear market as hedge funds that rode the AI investment frenzy unwound their momentum investing all at once. Momentum investing is a strategy that concentrates on stocks that have risen the most recently. The Philadelphia Semiconductor Index fell about 10% last week, marking its steepest weekly drop since April last year. The index is now down more than 20% from its June peak.
Against this backdrop, global investors are turning their attention to Big Tech earnings reports that begin in earnest this week. This earnings season is expected to serve as a test of whether it will reaffirm the AI investment boom or mark a turning point that exposes cracks in the AI rally.
Tesla and Alphabet Inc. will kick off the earnings season on the 22nd local time. Next week, Microsoft and Meta Platforms Inc. will report on the 29th, followed by Apple Inc. and Amazon on the 30th. The combined market capitalization of these six companies accounts for about 25% of the entire S&P 500 Index. Their results are seen as a major turning point for both the continuation of AI investment and the direction of the New York stock market.
■ "A signal of reduced spending could spread shock waves across the entire AI ecosystem"
The key question is whether Big Tech will maintain its push to expand AI investment or begin to slow the pace. The market is paying close attention to Alphabet Inc. With a market capitalization of about $4.2 trillion, it is the third-largest company in the United States and a core member of the Magnificent Seven that has driven gains in the New York stock market. It is also a leading hyperscaler pouring massive sums into AI data centers and infrastructure.
Alphabet Inc.'s AI investment plans have been a key driver of this year's semiconductor rally. Markets are watching closely to see whether guidance for AI-related capital expenditure will be maintained. Capital spending this year is expected to more than double from last year to $187 billion. The combined capital expenditure of Alphabet Inc., Microsoft, Amazon, and Meta Platforms Inc. is projected to reach $725 billion this year and nearly $900 billion by 2027.
Kevin Mann, chief investment officer at Hennion & Walsh Asset Management, told foreign media that "if Alphabet Inc. signals any form of spending cut in relation to its AI investment plans, the shock could spread across the entire AI ecosystem."
■ "The key is whether physical capacity is actually expanding, not just the amount invested"
Market watchers warned that the rise in Big Tech capital spending alone should not be taken as proof that the AI investment frenzy is continuing. As prices rise for memory semiconductors and other inputs, the amount of AI computing capacity that can be secured with the same amount of money is shrinking. Morgan Stanley estimates that construction costs per gigawatt for major AI systems have recently risen by about 20%. As much as 20% to 30% of the increase in AI capital expenditure may reflect higher costs from inflation rather than actual capacity expansion.
Experts stressed that "what matters is not the increase in capital expenditure itself, but how much power capacity, GPU deployment, memory purchases, network investment, and new data center construction are expanding." In other words, concrete indicators of capacity expansion must be met. Max Kettner, chief multi-asset strategist at HSBC Holdings plc, told the Financial Times that "expectations for profit growth at semiconductor companies remain excessively high" and that "if earnings continue to fall short of expectations, momentum unwinding could last longer than anticipated."
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