(Bloomberg) — Three years have passed since OpenAI ignited excitement in the realm of artificial intelligence with the launch of ChatGPT. While investments continue to surge, questions are beginning to arise regarding the sustainability of this growth. Recent declines in Nvidia Corp.’s stock, Oracle Corp.’s drop following its report of escalating AI expenditures, and a shift in investor sentiment toward businesses linked to OpenAI are all contributing to a growing atmosphere of skepticism. As we look ahead to 2026, investors are grappling with the decision to either reduce their AI investments in anticipation of a potential market correction or to double down on this transformative technology.
### Investor Sentiment Shifts
Jim Morrow, CEO of Callodine Capital Management, noted, “We’re in the phase of the cycle where the rubber meets the road.” He acknowledged that while the narrative surrounding AI has been positive, it is now time to assess whether the expected returns on investment can be realized. Concerns regarding the AI sector stem from the practical applications of the technology, the substantial costs related to its development, and the question of whether consumers will ultimately be willing to pay for these services. The resolution of these issues will significantly influence the trajectory of the stock market.
The S&P 500 has enjoyed a remarkable three-year bull market, buoyed by major technology companies such as Alphabet Inc. and Microsoft Corp., along with firms that support AI infrastructure, including chip manufacturers like Nvidia and Broadcom. Should these stocks cease their upward trend, the broader equity markets will likely follow suit. Sameer Bhasin, principal at Value Point Capital, explained, “These stocks don’t correct because the growth rate goes down; they correct when the growth rate doesn’t accelerate any further.”
### Optimism Amidst Caution
Despite the growing concerns, there remain several reasons for optimism. The tech giants at the forefront of AI investment possess significant resources and have committed to continued financial support in the coming years. Furthermore, companies like Alphabet are making progress with new AI models. This backdrop sets the stage for a complex debate among investors.
OpenAI alone is projected to invest a staggering $1.4 trillion over the next few years. However, under the leadership of Sam Altman, the company, which became the most valuable startup globally last October, is currently generating revenue that falls significantly short of its operational expenses. Reports indicate that it anticipates a net loss of $115 billion through 2029 before achieving profitability in 2030. OpenAI has successfully raised $40 billion from investors, including Softbank Group Corp., earlier this year.
Nvidia announced plans to invest as much as $100 billion in September, part of a series of arrangements aimed at channeling funds to its clients, raising concerns about a cycle of financing within the AI sector. If investor enthusiasm wanes and funding becomes scarce, OpenAI could face significant challenges, which would reverberate through its network of associated companies, such as CoreWeave Inc.
### The Impact of External Funding
The reliance on external capital for AI initiatives is a common theme among many companies. Oracle’s stock experienced a surge as it garnered substantial cloud service bookings, but the financial demands of constructing data centers necessitate significant cash investment. To fund these projects, Oracle has issued tens of billions of dollars in bonds, which creates financial pressures since bondholders expect timely cash repayments, unlike equity investors who primarily benefit from rising stock prices.
Oracle’s stock took a hit after it reported capital expenditures that exceeded analyst forecasts for its fiscal second quarter, along with disappointing cloud sales growth. Further compounding the issue, news of delays in data center projects for OpenAI led to additional declines in Oracle’s shares, impacting other stocks connected to AI infrastructure. A measure of Oracle’s credit risk has reached its highest point since 2009. An Oracle representative maintained that the company remains confident in its capacity to meet its financial commitments and continue its expansion.
### Capital Expenditure Trends
Major players like Alphabet, Microsoft, Amazon.com Inc., and Meta Platforms Inc. are expected to collectively allocate over $400 billion toward capital expenditures in the upcoming year, primarily for data centers. Although these companies are witnessing growth in AI-related revenues from cloud services and advertising, this income does not yet cover their substantial expenditures. According to Michael O’Rourke, chief market strategist at Jonestrading, “Any plateauing of growth projections or decelerations will lead the market to assert that an issue exists.”
Earnings growth for the so-called Magnificent Seven tech giants—comprising Apple, Nvidia, Tesla, and others—is forecasted to be 18% in 2026, marking the slowest growth in four years, yet still slightly above the overall S&P 500. A significant concern lies in the increasing depreciation costs associated with the rapid expansion of data centers, which shot up from around $10 billion in late 2023 to nearly $22 billion in the most recent quarter and is expected to reach about $30 billion by this time next year. This trend could exert pressure on stock buybacks and dividends, which are crucial for returning cash to shareholders. In 2026, both Meta and Microsoft are anticipated to experience negative free cash flow when accounting for shareholder returns, while Alphabet is projected to break even.
### Strategic Concerns for Big Tech
A major issue stemming from this extensive spending is the strategic shift it indicates. Historically, Big Tech’s value has hinged on its ability to generate rapid revenue growth with minimal costs, leading to significant free cash flow. However, their current investments in AI are altering this foundational principle. O’Rourke cautioned, “If we continue down the track of leveraging our companies to build out for the hopes of monetizing this, multiples are going to contract. If things don’t align as expected, this pivot could turn into a profound mistake.”
While valuations of big tech firms are elevated, they do not reach the extremes observed during previous market highs. Comparisons with the dot-com boom are prevalent, yet the scale of gains attributed to AI is distinct from the internet’s early days. For instance, the Nasdaq 100 Index currently trades at 26 times projected earnings, a stark contrast to the over 80 times seen at the peak of the dot-com bubble. The valuations during that era were significantly inflated due to the nascent and less profitable nature of many companies.
### The Dilemma for Investors
Investors now find themselves in a complex situation. Although the risks associated with AI investments are becoming increasingly apparent, many companies are not yet trading at alarmingly high valuations. The critical question remains: what direction will the AI sector take moving forward? Bhasin remarked, “This kind of group thinking is going to crack. It likely won’t collapse as it did in 2000, but we will see a rotation.”
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