AI stock valuations face reset as Nasdaq wobble tests market boom

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AI stock valuations reset

Highlights

Nasdaq 100 dropped 5.5% last week, intensifying scrutiny of AI-linked stock valuations after years of tech sector outperformance.
Amazon, Microsoft, Google, and Apple spent $425 billion in AI capital expenditure in 2025, projected to grow to $800 billion this year and over $1.1 trillion next year.
IMF warns corporate bonds from hyperscalers now represent nearly 10% of the global investment-grade credit market, with rising sector borrowing amplifying systemic risk.

Valuation pressure builds around AI spending

As reported by The Guardian, last week's 5.5% drop in the Nasdaq 100 is feeding debate over whether equity markets are starting to challenge the pricing of AI-linked companies after a long rally in technology shares.

The pressure is not limited to U.S. markets. The failed attempt by Australian datacentre company Firmus to list on the ASX has added to investor caution after the proposed flotation at one stage implied a valuation above Telstra before the company had delivered its promised earnings.

Gerard Minack of Minack Advisors says investors are fundamentally overestimating the returns AI providers will be able to deliver, although he adds that he does not have confidence in calling the precise top of the market. Even after the recent wobble, the Nasdaq 100 remains worth nearly three times as much as at the start of 2023, while Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla now make up 35% of the S&P 500, up from 12% a decade ago.

Raisah Rasid, a global market strategist at JP Morgan Asset Management, says the sell-off reflects a reset in valuations rather than doubts about the usefulness of AI itself. She describes AI as a long-term structural transformation, but points to two larger threats, cheaper open-source models that could weaken the sector's economics, and a possible backlash against datacentres or the effects of AI on workers and society.

Debt exposure and funding links raise broader risks

The coming U.S. quarterly earnings season is expected to offer a fresh test of whether AI companies can justify elevated valuations. Sally Auld, NAB's chief economist, says the recent pullback looks more like investors pausing to take a more balanced approach than abandoning the trade altogether.

Another concern is the growing reliance on borrowing to fund AI infrastructure. Minack says Amazon, Microsoft, Google and Apple, among other hyperscalers, spent $425 billion in AI-related capital expenditure in 2025, are on track to invest $800 billion this year and more than $1.1 trillion next year.

According to the International Monetary Fund, corporate bonds issued by these companies now account for nearly 10% of the global investment-grade credit market, up from 0.5% at the end of 2024. The IMF last week listed a burst AI investment bubble among the top risks to the global economy, alongside sharply rising borrowing costs and the threat of a major cyber-attack.

Auld also points to increasing circular financing arrangements, such as equipment makers helping fund datacentre construction in exchange for future chip purchases. She says such structures can unravel quickly if AI demand falls short, though she adds the direct macroeconomic threat is greater in the U.S. than in Australia, where datacentre investment is rising but is still not a major share of the economy.

Our earlier article on U.S. AI data centers highlighted how the $10 trillion infrastructure buildout is running into mounting constraints, including higher financing costs, construction delays/cancellations, and power-grid limits. It also noted that only a minority of planned projects are viewed as credible, while examples such as CoreWeave’s sell-off and cost overruns at specific builds underscore how quickly funding pressures can erode investor confidence.

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