How dangerous is the collapse of AI stocks? Answers to the main questions
Shares of companies related to the development of artificial intelligence (AI) have plummeted. This may be either a temporary reaction to political changes in the United States, or a sign that investors have become disillusioned with this industry and are not ready to invest in it. The financial world is trying to understand whether there is a bubble in the AI market and whether it can burst. The answers to the main questions about the crisis and its consequences are in the Izvestia material.
How did the collapse happen?
• On November 5, stocks of companies directly or indirectly related to the artificial intelligence industry began to collapse in the United States. During one day of trading, all significant stock indexes that measure the state of the market fell. The S&P 500 index, which unites the 500 largest companies, fell by 4.35%, the Nasdaq 100 index, which excludes financial players, fell by 6.36%, the Nasdaq technology index collapsed by 5.52%, and the Dow Jones industrial index fell by 3.44%. For most of them, it was the worst day since April 2025, when US President Donald Trump imposed global tariffs, and for the Nasdaq 100, it was the worst since March 2020, when the COVID-19 pandemic began.
• The massive stock sell-off has caused the value of a number of companies to drop significantly. The total volume of losses among shareholders in one day amounted to $2.5 trillion. The owners of shares in the so-called "magnificent seven" of leading technology companies, which include Apple, Microsoft and Alphabet (owner of Google), lost $1 trillion.
• The sell-off was concentrated in companies that were considered the main beneficiaries of the AI boom. Nvidia, the processor manufacturer, fell particularly sharply, with its shares falling by 9.26% and its value declining by $447 billion. Its competitor Philadelphia Semiconductor Index fell by 12%, AMD — by 17.3%. The fall also affected related areas. Thus, data storage equipment manufacturer SanDisk collapsed by 22%, and cloud provider CoreWeave fell by 10%.
• Following the US, Asian markets were hit by sales. The Korean KOSPI index fell by 6.02%, although at the moment the drop was 8%, which led to the suspension of trading. The Japanese Nikkei 225 index fell by 5.96%, which was the third largest drop in its history. Taiwan's Taiex lost 4.5% and posted its strongest weekly drop since 2001. The Chinese and European markets were less affected, where the decline in the main indexes did not exceed 2%, but individual companies and sectors also sank by several percent.
What are investors afraid of?
The reason for one of the biggest sales in recent years was the results of the midterm elections in the United States. The Democrats won, both in Congress and at the state level. Investors took this as a signal that the new authorities could introduce stricter regulation regarding AI, as well as slow down or suspend the construction of new data centers (data centers). This directly affected the demand forecasts for chips and equipment, as about 40% of the planned data centers were at risk.
• In addition, even before the elections, there was growing concern in the market that the shares of AI companies were a "bubble", that is, they were overvalued and could not provide the profits that investors expected by buying them at rising prices. There were growing concerns among analysts that expectations from AI were overstated, and huge investments in infrastructure were not capable of producing quick returns. Some investors might have thought that the shares would no longer grow, and hurried to sell them in order to lock in profits and avoid falling in the future.
• Last but not least, macroeconomic pressures have had an impact. In the United States, interest rates on loans are rising, and data center construction and other capital expenditures in AI are financed mainly by borrowing. In the current environment, the debts of technology companies are growing faster than at lower rates, which further puts pressure on their profits and the attractiveness of stocks. The energy crisis and rising fuel prices do not directly affect AI, but they accelerate inflation, which affects all market participants and makes investors more cautious.
What are the dangers of stock sales?
• In itself, the fall in stock prices is not a negative phenomenon for the economy. It does not directly lead to bankruptcy, production shutdowns, and staff reductions. But when sales become widespread and affect several areas, the damage to the financial system and the real economy can become significant. Investors, from individuals to large funds, can make serious bets on the growth of stocks, hoping to make a profit from the sale, but when the indices fall, they incur losses and lose the funds they originally expected.
• It is especially dangerous if shares are bought with debt or backed by other assets with a floating value. Falling prices force stockholders to sell off securities in order to fulfill their obligations and avoid bankruptcy, but with a large drop in the proceeds, there may not be enough. Stock sales trigger a spiral of losses when more and more stockholders are forced to sell assets, which only pushes prices down further and leads to even more sales. The behavior of investors can be influenced by the emotional background, which encourages them to join in the general panic and contribute to mass sales.
• Through a chain of funds and intermediaries, stocks determine the well-being of households that have accumulated money and wanted to protect it from inflation, if not increase it. If stocks fall, then savings decrease, and this can already change the consumer behavior of a significant proportion of the economically active population. If the level of consumption falls, then companies that have built their activities in the expectation that their products and services will be in demand suffer.
• A separate negative consequence of stock market sales is the transfer of capital from stocks to other, less risky instruments. Investors are starting to invest not in real companies that are pushing the economy forward, but in government bonds, precious metals and currency. Companies are losing their source of investment and are forced to slow down their operations, which leads to a gradual decline in the economy. Stock sales essentially lead to the withdrawal of funds from the economy that could benefit if properly invested.
Is the sale in AI a temporary phenomenon?
• Based on the results of one trading session, it is too early to say how serious the processes are unfolding. The situation can be assessed both pessimistically and optimistically. No analyst can provide the full picture in order to state with absolute accuracy how overvalued the AI market is and whether it is capable of functioning after the Democrats came to power in the United States.
• The current drawdown can be assessed as an overly emotional reaction to the election. No matter how much the new governors and congressmen want to limit the work of AI companies, they will not be interested in cutting off an entire sector of the economy and plunging the country into crisis. The AI industry itself needs to get rid of inflated expectations, and the current situation encourages investors to moderate their appetites, and companies to carefully assess their capabilities and financial performance. In addition, the dramatically changed political background in the United States may change just as rapidly in two years, and then AI companies will have bright prospects again.
• At the same time, a clear gap remains between huge costs and low profits in the field of AI. It is he who points out that the current sales are the beginning of a collapse that has been waiting for a convenient moment and bringing several factors together at one point. Now that even more attention is focused on the industry, it may turn out that the quality of companies is really low, that they are unable to fulfill their obligations and live in debt without a chance of stable profits. If new signs of a bubble are found, the outflow of investors will continue and become even stronger than it is now.
What does the dotcom crash have to do with it?
• The AI sell-off has been compared to the "dotcom crash." This is the name of the sharp rise in shares of Internet companies in the late 1990s and the bubble that inflated because of this, which burst when it became clear that new companies were ineffective and not worth the money invested in them. The two situations have in common euphoria and high expectations from new technologies that should completely change the lives of mankind, huge capital expenditures and extreme concentration of the industry within a small group of companies.
• However, there are also many differences. First, Internet companies in the late 1990s were almost completely unprofitable, while many modern technology giants such as Microsoft and Nvidia generate significant profits. Secondly, past crises have taught investors to be more careful about debt financing and to avoid it when it comes to startups and new technologies. Today, AI giants are actively attracting investments not from banks, but from large investors who are willing to take risks.
• Thirdly, the Internet companies of the past lacked a customer base that could load the infrastructure that required capital investments. Their capacities were idle because the era of total Internet penetration into the global economy had not yet arrived. AI is entering everyday life faster and easier, and the infrastructure reserved for it is still in high demand. This is indicated at least by the increase in the cost of processors, even if we are talking about outdated models.
Finally, the market is now behaving much more maturely with regard to AI, when compared with the behavior of investors at the beginning of the 21st century. At that time, the shares of Internet companies were growing by thousands of percent, which clearly indicated the speculative nature of such growth. AI companies are also growing above the market, but much more moderately and steadily, preventing the same sharp rises.
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