Is AI Spending Masking the Cracks In the Stock Market

Has AI Spending Peaked?

One of the biggest questions investors are now asking is when AI spending starts to slow and whether that becomes a problem for markets. After the Nasdaq fell 2 percent and the S&P 500 dropped 1.2 percent, the sharpest pullback in weeks, sentiment has clearly shifted. Much of the concern centres on the sheer scale of capital being poured into AI infrastructure by companies like Meta, Google, and Amazon. According to new data from JPMorgan, AI-related capital expenditure now accounts for roughly 17 to 18 percent of US GDP, an extraordinary figure that highlights just how dependent the market has become on this single growth driver.

The worry among analysts is that once this wave of investment begins to ease, the broader economy could feel the slowdown. Consumer spending growth remains soft, and productivity improvements outside of the AI sector have been weaker than expected. That creates a difficult balance: while AI spending continues to drive earnings and innovation at the top end of the market, it may also be masking the underlying fragility in other parts of the economy. For investors, the key question is whether the next leg of the market rally can stand on its own once AI enthusiasm inevitably cools.

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Tech Giants Cut Jobs as AI Reshapes Spending Priorities

We are also beginning to see job cuts ripple through the broader technology sector, a sign that companies are shifting priorities. Many management teams appear to be restructuring their operations to improve margins and reduce overheads, with AI playing a central role in that transition. Automation and efficiency gains are allowing businesses to streamline their workforces, redirecting capital toward higher-return initiatives. IBM just announced thousands of job cuts this quarter, while Amazon recently confirmed the reduction of around 14,000 positions as it continues to pour billions into AI infrastructure.

The concern for investors is that this wave of spending and restructuring may signal the later stages of a growth cycle rather than its beginning. Market concentration remains extreme, with Nvidia now accounting for roughly 8 percent of the S&P 500, Microsoft at 6.7 percent, and Apple at 6.9 percent. When such a small group of companies drives most of the market’s returns, it creates what analysts refer to as a “dispersion effect.” In practice, it means that when sentiment turns or spending peaks, the market can shift direction abruptly. We may be starting to see the first signs of that shift, as investors begin moving away from risk-on assets in search of stability and yield.

Wall Street Warns the Rally May Be Running Out of Steam

The Wall Street Journal recently reported that Morgan Stanley CEO Ted Pick joined other major financial leaders in cautioning that the market’s winning streak has left stocks increasingly vulnerable to a pullback. After months of strong gains, the balance between risk and reward has started to tilt unfavourably. Rising trade tensions, a softer macroeconomic outlook, and growing concerns about inflated valuations are all contributing to a more cautious tone among institutional investors.

In particular, the so-called “glorified” names that have led the rally, especially in technology, now trade at premium prices that leave little room for error. When markets become this concentrated and valuations this stretched, even minor disappointments can trigger outsized reactions. For investors, this is a time to be selective rather than euphoric, focusing on businesses with genuine earnings resilience and disciplined capital allocation instead of those riding momentum alone.