The AI trade that’s driven markets for three years just hit a wall. Alphabet and Tesla’s earnings spooked investors already jittery about ballooning capex commitments, and Wall Street answered with its worst Big Tech selloff since April 2025’s tariff shock. Add an escalating Iran conflict pushing oil higher, and you’ve got what one fund manager called “the perfect storm.” South African investors with offshore exposure via retirement funds, ETFs, or platforms tracking the Nasdaq will feel this one too, and Naspers/Prosus holders should watch how global tech sentiment spills into Tencent’s valuation.
By Ryan Vlastelica
Wall Street is growing increasingly concerned about the hundreds of billions of dollars Big Tech is spending on artificial intelligence just as the resurgence of the war in Iran clouds the global macroeconomic outlook.
The Magnificent Seven technology behemoths suffered their biggest one-day drop since the tariff tantrum in April 2025 on Thursday, with an index of the group falling 4.8% and wiping out $797 billion in market value. The selloff pushed the S&P 500 Index down 1.2%, while the tech-heavy Nasdaq 100 Index sank 1.9%.
The culprit was earnings from Alphabet Inc. and Tesla Inc. after the bell on Wednesday, which spooked traders and cast doubt on the durability of the AI trade that has powered the stock market for more than three years. Alphabet raised its capital spending forecast to as much as $205 billion this year. Meanwhile, Tesla Chief Executive Officer Elon Musk told investors that 2026 will be “a massive capex year” after the electric vehicle maker reported profits that were far below analysts’ expectations.
“The real problem is the amount of spend that’s going on,” said Ken Mahoney, chief executive officer of Mahoney Asset Management. “No one knows what the return on investment is.”
The macro backdrop, including oil prices rising as the war with Iran escalates, is increasing the pressure on these stocks, he added.
“It’s the perfect storm,” Mahoney said.
Chip stocks also took a hit, with the Philadelphia Stock Exchange Semiconductor Index dropping 0.5%. The group is the biggest beneficiary of AI spending, and the index is up more than 70% this year. But trading has gotten increasingly volatile, with just five sessions in the last two months having less than 1% swings.
The selloff is coming as investors grow increasingly cautious about the massive sums that Big Tech firms are spending to build out their AI infrastructure. The Mag 7 index is now down 11% from a record reached in late May, erasing $2 trillion in market value.
Wednesday’s earnings reports fed into those concerns. While Google-parent Alphabet posted encouraging results featuring robust growth in its cloud-computing business, its spending forecast was more than expected, even though Alphabet had telegraphed the increase when it raised capital in early June. The $45 billion it spent in the second quarter turned its cash flow negative for the first time as a public company.
“That suggests there’s a lot more risk in the stock now than there was before, when it was a cash-generation machine,” said Jason Lemire, chief investment officer at Bold Wealth Partners.
Meanwhile, Musk said that Tesla “should be spending on capex as fast as we can — spend as fast as we can without it being too wasteful.”
Tesla shares plunged 15% on Thursday, their worst day since March 2025, and Alphabet sank 7.1% for its biggest drop since May 2025. Other major AI spenders also fell, with Microsoft Corp. sliding 2.2%, Amazon.com Inc. sinking 4.6% and Meta Platforms Inc. declining 3.4%. All three report earnings next week.
While every member of the Magnificent Seven was in the red, Apple Inc. had the shallowest decline. The iPhone maker has largely sat out the AI spending spree, something that investors have been rewarding lately. Its shares have gained 11% this month and 18% this year.
As for the rest of the group, the risks that are driving the selling are real and something investors need to watch closely. For years, Wall Street applauded big AI spending plans, sending the stocks soaring after each new announcement. That sentiment has turned, and now the stocks are getting punished if those expenditures aren’t showing concrete payoffs in a much bigger way.
“These companies used to have the healthiest balance sheets in the history of corporate America, now they’re asset heavy and there’s a question about the ROI,” Lemire said, referring to the companies’ return on investment. “That’s a big change in how investors need to view them, and that’s before you get to the lack of transparency in terms of their exact debt obligations over the coming years.”
© 2026 Bloomberg L.P.
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