Disappointing earnings reports have rattled investors, erasing trillions of dollars from market values.
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The industry's biggest technology companies are facing questions about how much they are spending on artificial intelligence, and their combined market valuation has fallen by trillions of dollars.
From its 6 October peak through the end of the month, the Nasdaq 100 fell more than 9%, wiping out an estimated £5 trillion in market value.
"For three years, tech giants could win over investors simply by announcing AI spending," observed Grgoire Kounowski, head of advisory at wealth manager Norman K. "That has changed. Third-quarter earnings mark a turning point: investors now want to know when the spending will generate returns - and how companies will pay for it."
AI's biggest companies, particularly hardware makers such as Nvidia (NASDAQ:NVDA), have watched profits surge and market capitalizations balloon as spending on AI infrastructure has risen sharply.
Investors are growing wary of whether these higher AI profits can last. Companies that cannot show clear returns from their AI spending may now face a harsh market response.
Has AI cannibalised Google Search?
The sell-off started on 28 October, after Google's parent company, Alphabet (NASDAQ:GOOGL), released its Q3 2026 results. Diluted earnings per share (EPS) dropped 26.1% year on year to £2.12, far below analysts' forecast of £3.02.
Google Search queries hit a record high, yet segment revenue growth fell to 12%, down from 17% the previous quarter. That gap suggests Google's AI Overviews may be weakening its ability to make money from Search.
Alphabet's shares fell 12.6% the next day and slid another 1.4% on October 30.
"Alphabet lost £463 billion in market value in a single day," said Dan Coatsworth, head of markets at wealth manager AJ Bell. "The company's results may be remembered as a turning point for AI. They revealed another quarter of cash burn, while AI-generated search summaries were starting to hurt advertising revenue. The bearish view many investors had brushed aside now looks increasingly real."
Alphabet was joined by Intel (NASDAQ:INTC), whose shares dropped 28.6% on 30 October after the company issued an alarmingly bleak Q4 forecast alongside its Q3 results the previous evening.
"This week's steep drops in shares such as Alphabet and Intel show how sharply investor sentiment has shifted," Coatsworth said. "The price action suggests tech investors would rather leave the treadmill than merely slow their pace."
How do investors feel about AI?
The AI stock market boom can last only as long as investors continue to believe the technology has room to grow.
Research by the Association of Investment Companies (AIC), which represents the UK's investment trusts, found that investors currently feel more negative than positive, even though they see some long-term potential in the technology.
The AIC surveyed 400 private investors and 200 intermediaries. Their main worries about AI were misinformation, cited by 74%, job losses at 73%, and declining human skills at 72%. Privacy loss concerned 51% of respondents, while 45% were concerned about added pressure on water resources.
"Given that AI companies themselves have issued apocalyptic warnings, investors' concern about AI's possible harms is hardly surprising," said Nick Britton, research director at the AIC. "News reports have also highlighted waves of AI-related job losses, while the technology's actual or potential benefits still feel remote and hypothetical to most people."
"As long as the AI investment boom holds and investors keep making money, they may ignore those fears," Britton continued. "A market correction would change that. AI companies might then need to convince investors that they can still deliver growth while dealing with those broader concerns."
However, 68% said improved access to healthcare and medical breakthroughs was positive.
Will the AI boom recover, and should you invest?
Investor confidence has triggered AI selloffs before during the past four years. Each earlier wave of pessimism eventually gave way to a market recovery.
The next round of earnings reports from companies such as Apple (NASDAQ:AAPL), Palantir (NASDAQ:PLTR), and Advanced Micro Devices (NASDAQ:AMD) will help determine whether stocks recover.
"Investors will want capital spending to stay at a reasonable level while growth exceeds expectations; that combination could help prevent sell-offs," said Susannah Streeter, chief investment strategist at wealth manager Wealth Club. "The sweet spot is growth without runaway spending."
If you expect the AI boom to recover, an AI-focused exchange-traded fund (ETF) could be worth considering. Technology trusts such as Allianz Technology Trust (LON:ATT) and Polar Capital Technology (LON:PCT) are other options.
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