The rout in global artificial intelligence (AI) related stocks is gaining momentum. The cracks that developed a couple of months ago over concerns of skyrocketing, unrealistic valuations for AI and AI-related chip maker stocks, are widening to engulf more companies and markets.
Following a sell-off in US Nasdaq and S&P 500 led by AI chip makers last evening, fears of the AI euphoria ending spread to Asian markets too. South Korean benchmark Kospi fell 7 percent and Japan’s Nikkei too dropped about 3 percent while Taiwan’s Taiex fell by about 4 percent (in early trades on Thursday).
What changed overnight? A higher-than-expected inflation in the US. The Consumer Price Index report from the US Labor Department released on Wednesday pointed to broadening price pressures from energy to daily consumption goods and services. The upshot: sticky, elevated inflation, which implies that the US Federal Reserve’s rate hikes may be closer than earlier forecasts.
The concern is real for the AI sector. After all, it is among the highest borrowers in the corporate world globally. Rising borrowing costs, evidently, will weigh on profitability. Note that for nearly four years, cash has been pouring into AI and its ecosystem, be it semiconductor firms, chip makers, data centres and even cable manufacturers.
The United Nations Conference on Trade and Development (UNCTAD) estimates that debt financing for AI investment will reach $4.1 trillion by 2030, out of total capital expenditure of $5.5 trillion. This apart, the AI revenues are said to be concentrated among a small group of players, and much of the money flows in a circle. Concerns over the circular flow of capital have often been raised during periods of decline in AI stock prices.