Opinion
It was only earlier this month and here in this very column that I wrote about the importance of doing your research and seriously considering your appetite for risk before investing in the tech sector.
And as if right on cue, the market demonstrated exactly why people are increasingly recommending investors move with caution.
Over the course of a single week of trading last week, more than $US1 trillion ($1.43 billion) was wiped from the stocks of 20 of the world’s biggest semiconductor and AI companies. That sounds pretty bad, right? Well, skip to this week, and the share prices of many of those same companies were already enjoying a rebound.
Unlike more established investment industries, there is still a lot we simply do not know about where the AI train is headed, which is in part what makes it so volatile – and the potential rewards so appealing.
While for some seasoned investors riding this rollercoaster is simply part of the experience, two interesting things are taking place that make paying attention to this specific issue especially important, and worth me banging on about.
The first is that according to a new report from the ASX, more Australians are now investing than ever before. The second is that thanks to the hype surrounding the AI industry generally and the looming IPOs for two major artificial intelligence companies – Anthropic and OpenAI – many Australian investors, and specifically young investors with decades of portfolio time on their side, are seriously considering putting their hard-earned money into this sector.
Most analysts agree the AI industry overall is still solid, but that doesn’t inherently make it a safe investment with a guaranteed return.
What’s more, the timing of all of this matters, and not just because of those IPOs. For a while now, AI stocks have stood out in part because of the seemingly unrelenting unpredictability of the sector, and in part because market experts are increasingly worried about the fact that most of these companies are reliant on debt to fund their growth.
And as interest rates in the US rise (and US Treasury yields in the bond market hit increasingly higher levels), that has the potential to become a massive, expensive problem.
Take CoreWeave, an American cloud computing and data centre operator whose IPO in March 2025 marked the biggest public debut for a tech company since 2021. By June 2025, just three months later, the company reached a market cap of $US90 billion and shareholders were feeling pretty happy about getting in early on the neocloud company (these businesses rent computing power to companies building AI).
At the end of last year, they had about $US30 billion of debt and liabilities on its balance sheet. By the second quarter of this year, the debt figure had grown to $US52 billion. Even worse is when you cut to today, where CoreWeave stocks have dropped by 30 per cent this month alone, and its valuation has been virtually cut by two thirds of what it was 18 months ago – diving to about $US34 billion.
In large part, this decline is because CoreWeave is reliant on debt to fund its growth and is not yet profitable. So, those rising interest rates are hitting pretty hard – to the point where its bond yields rose to levels that generally signal distress.
While this is just one company, it is causing investment experts to ask important questions about the tech sector and if the boom times it has been enjoying can really last.
Last month, Deutsche Bank published a research note that warned the level of AI spending we’re currently seeing is unsustainable. But, it noted, if spending slows before the sector’s promises come to fruition, it could wreak economic havoc.
As the bank’s head of FX Research George Saravelos wrote, market growth “is not coming from AI itself, but from building the factories to generate AI capacity”. In other words, many of these companies are selling future potential, not a verified reality.
Earlier this month, the global investment bank RBC Capital Markets issued a recommendation that their clients reduce their tech holdings, after previously recommending higher than average holdings.
In downgrading the tech sector’s outlook from “overweight” to “market weight”, RBC also said investors should instead look at more traditionally safe stocks such as healthcare – because sectors like these tend to perform well irrespective of what’s happening in an economy because people will always need access to medicine and medical care.
Now, at this point it is sounding a bit doom and gloom, which is not entirely the case. In his note to Deutsche Bank investors, Saravelos noted that “AI machines – in quite a literal sense – appear to be saving the US economy right now”. He also said that “In the absence of tech-related spending, the US would be close to, or in, recession this year.”
In other words, it’s still doing well, but there is a lot riding on that not changing, and it’s important to be keenly aware of that risk.
While most analysts agree that the sheer level of demand for AI – as in, people continue to use it and remain willing to pay for the services – means the industry overall is still very much safe, that doesn’t inherently make it a safe investment with a guaranteed return.
And when you’re talking about people investing their savings as a means of creating long-term wealth (as opposed to investors with several more zeros to their bank balances), this matters an awful lot.
As I’ve said a hundred times, one of the most important factors your money can have is time in the market. For some investors, being able to ride the highs and lows of volatile stock over a long period of time might be OK.
But another important factor is ensuring that your money is working for you in a way that will help you achieve your financial goals. If you’re planning to one day access that money to put towards something like a house or as you move towards retirement, there’s a very real risk that when you go to sell a volatile stock, you won’t be able to do so without losing money.
That will mean you either have to wait out the dip, or eat the loss – neither of which are especially great options.
The added layer of difficulty in all of this is that if you ask 10 experts, there’s a good chance you’ll get at least five different perspectives. But to my mind, that’s why doing your research and backing your own decision once it’s informed, is the foundation to good investing – especially when risk and volatility are involved.
Victoria Devine is an award-winning retired financial adviser, a bestselling author and host of Australia’s No.1 finance podcast, She’s on the Money. She is also founder and director of Zella Money.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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