Nasdaq dives 750 points as investors reassess AI spending

Stocks slid sharply on Thursday amid mounting concerns over whether massive investments in artificial intelligence will pay off and high oil prices.

Shortly before the close of trading, the Nasdaq Composite Index, where many technology companies exposed to AI are listed, tumbled 751 points, or 2.8%, before rebounding slightly to close 694 points lower at 26,009. The broader S&P 500 fell 1.2%, while the blue-chip Dow Jones Industrial Average eked out a small gain of less than 0.1%.

Investors are increasingly worried about the enormous debt AI companies are taking on to finance data center spending and whether the companies will generate the profits investors are banking on, according to Wall Street analysts. 

"AI growth is dependent on capex (this is one of the most capital-intensive industries ever), and since capex is dramatically outpacing op. cash flow, companies are reliant on the largess of equity and debt investors to underwrite all the spending, but lately those markets are becoming increasingly less accommodating," Adam Crisafulli, head of Vital Knowledge, said in a research note to investors on Thursday. 

Slowing debt issuance as the credit environment tightens could hinder companies' ability to finance the AI infrastructure buildout, Crisafulli added.

The Brookings Institution, a nonpartisan think tank, estimates that it will cost more than $10 trillion to develop AI infrastructure between 2025 and 2032. That would amount to the largest tide of investment in U.S. history, dwarfing the construction of the railroads in the 19th century and, more recently, the dot-com boom, according to Carl Weinberg, chief economist for the financial market analysis firm High Frequency Economics.

Although many of the big players driving the AI boom remain highly profitable, investors are reassessing those massive costs as their stock prices soar. 

The drop in markets on Thursday came amid a series of earnings reports that showed mixed performance results. Meta Platforms, which is pushing its Muse AI agent, lost 7% after revenue topped estimates while profit fell short. Tesla slipped 3.1%, with the electric vehicle company reporting stronger-than-expected summer profits but weaker revenue than analysts expected.

A rise in oil prices, driven by concerns about escalations in the war in Iran, was also weighing on stocks on Thursday. West Texas Intermediate, the U.S. benchmark, was trading at $99.21 a barrel, up 2.1%, while Brent crude, the international standard, was trading at around $113 a barrel, up 3.7%.