Nasdaq Nears 10% Drop as Investors Question AI Spending Benefits

The selloff is picking up speed

The Nasdaq 100 is about to hit a milestone nobody wants. A 10% drop is called a market correction, and the index is practically knocking on the door.

This one is happening fast. Should the Nasdaq 100 actually fall into correction territory, the journey would have spanned only 38 trading days - far quicker than its prior correction in March, which required over 100 sessions.

The pain is even worse in semiconductors. The SOX, the Philadelphia Stock Exchange's semiconductor gauge, fell 4% on Tuesday. At its zenith, the SOX had increased by over 100%, and even now it retains a 56% gain for 2026.

The AI spending question is the real driver

Behind all this selling is one big question: Is all that money going into artificial intelligence actually going to pay off?

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Last week, Alphabet - Google's parent - posted its first-ever negative free cash flow as a publicly traded firm, a result of massive AI-related capital outlays. That news drowned out bright spots such as strong expansion in its cloud-computing segment.

Janney Montgomery Scott's chief investment strategist, Mark Luschini, commented, "The AI trade is being looked at with a much greater degree of skepticism, and the shift in sentiment means it has become something of a one-way trade with things getting sold unmercifully."

He described a negative feedback loop. Many companies that once had strong free cash flow have seen it shrink or turn negative because of AI spending. "People are taking that to its logical conclusion, and selling the names that have benefited from the spending," Luschini said.

Semiconductor stock declines are accelerating because signs of Chinese progress in advanced chip production are heightening worries that the boom in AI investment could prove temporary.

The selling pressure has been particularly intense in semiconductor stocks, which had led the rally. The Philadelphia Semiconductor Index's 24% decline from its peak reflects a sharp reversal of sentiment. Investors are now questioning whether the massive capital outlays for data centers and AI chips will translate into sustainable revenue growth, or whether the spending binge will ultimately depress returns on capital.

What the next few days could decide

All eyes are on the earnings reports coming this week from Microsoft, Meta, and Amazon. How they talk about their AI spending will likely determine whether this selloff deepens or fades. Investors are waiting to see if they also report negative free cash flow, similar to Alphabet.

Clearstead Advisors' senior managing director, Jim Awad, stated, "If they're able to prevail and reassure people this week, that will add a lot of support to the market. On the other hand, if we see more negative cash flow, a lot more spending, I think we can expect to see the group remain under pressure."

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