AI stocks have experienced a significant decline in recent days, with the Nasdaq falling over 6% from its all-time high set on June 2. This decline is largely due to the high valuations of AI companies, which have been built on the promise of the technology rather than actual profit growth.

Causes of the Decline

The high demand for AI has led to a surge in spending and borrowing by companies to develop the technology, without immediate results to show for it. The cost of building and developing AI has become incredibly expensive, with surging demand for high-powered chips and data centers.

Chip prices have risen significantly, creating a K-shaped AI industry where chipmakers’ stocks are performing well, while tech companies powering the AI models are struggling. Microsoft and Meta are in a bear market, having lost a fifth of their value from their peaks. Other tech giants, including Amazon, Apple, Google, Nvidia, and Tesla, are in correction territory, falling at least 10% from their recent highs.

Market Dynamics

The market dynamics are giving the industry pause, with OpenAI delaying its IPO due to recent market volatility. The Kospi index in South Korea, which has risen around 90% this year, has been volatile, with a 10% decline on Tuesday, followed by rises of 5% and 3% on Wednesday and Thursday, and then a decline again on Friday.

The tech sector has been fueling the stock market rally over the past several years, but rising bond yields and the potential for the Federal Reserve to hike interest rates in the coming months could hurt the tech sector, which is particularly susceptible to pain from high borrowing rates.

Original reporting: KRDO (Colorado Springs metro) — read the source article.