Analyst warns AI spending drags on tech stock cash flow, US stock pullback may not be over

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Did you think the tech stock market was already bleak enough last week? An analyst has issued a warning that if history is any guide, the tech industry's suffering may have only just begun!

Last week, U.S. tech stocks fell broadly, with the Nasdaq Composite Index down about 2% for the week and down 5.3% for October, its worst monthly performance since March 2025. The S&P 500 technology sector fell 4.24% on Friday alone, the worst performer among the eleven major sectors that day.

Keith Lerner, chief investment officer and chief market strategist at Truist Advisory Services, noted that since 2023, the S&P 500 technology sector has seen six pullbacks of 10% or more. Of those six declines, four had losses ranging from 14% to 27%. He believes this pullback will be no exception.

He further stated: "The issue is no longer simply that demand for artificial intelligence is strong. Rather, Wall Street is increasingly demanding evidence that massive investments can translate into lasting profits and cash flow."

On Friday, the artificial intelligence sector was hit hard, with more than $1 trillion in market value wiped out, as investors worried that large tech companies' heavy spending in AI would worsen their cash flow positions. And negative news about cash flow has been emerging endlessly during this quarter's earnings season.

Cloud services giant Google's parent company Alphabet reported last week that its third-quarter free cash flow swung from about $24.461 billion in the year-earlier period to negative $9.065 billion. Subsequently, Amazon's earnings report released late last Thursday also showed negative free cash flow. A week earlier, Meta disclosed negative free cash flow for the first time since 2012.

However, none of these top tech companies said they would slow their AI investments; on the contrary, they all said they would maintain or even increase their spending.

Chris Zaccarelli, chief investment officer at Northlight Asset Management, said the market is "much more sensitive than usual," and that investors would rather sell first and ask questions later than get stuck and continue to bear losses.

Well-known tech analyst Dan Ives, a partner at Yorkville Ives, said, "The disruptive impact of artificial intelligence has been on full display during tech companies' earnings season, and there is still much uncertainty about which companies and industries will be the disruptors and which will be disrupted."

He further pointed out, "Now is not the time to panic-sell all tech stocks and hide in a shelter... Despite last week's grim situation, the underlying signs of enterprise AI buildout are actually more solid than they were a week ago... thanks to what we heard from hyperscale data center operators and the results from Meta and SpaceX."

"That said, tech companies raising funds through the bond market, stock offerings, ATM programs and other means have also brought further pressure on the sector, exacerbating last week's market turmoil," he added.

(Source: Cailian Press) Middle of the article Embedded advertisement