Why is the Nasdaq falling? Wall Street tests AI and tech valuations

Wall Street reassesses the AI trade

The recent pullback on Wall Street has been concentrated in areas that had benefited most from the artificial intelligence boom. The Nasdaq Composite and S&P 500 have both come under pressure as investors reassess the scale of spending required to build AI infrastructure and question whether the expected returns can keep pace with valuations.

The sell-off has not been limited to chipmakers. Memory and processor names such as Micron Technology and SanDisk have also come under pressure, while the broader weakness has spilled into software stocks including Salesforce and Palantir. That suggests investors are no longer treating every AI-linked business as an automatic winner.

AI costs move into focus

For much of the past two years, markets were willing to look through rising expenditure because AI was seen as a potential source of future monopoly-like returns. That narrative is now being tested more closely.

Building data centres, securing advanced memory chips, buying graphics processors and sourcing large amounts of power all require substantial capital. The costs are immediate, while the mass-market revenue opportunity from AI remains harder to measure. That gap is becoming more difficult for investors to ignore.

Software stocks face a sharper question

The reassessment is particularly important for software companies. Earlier in the AI cycle, investors expected automation tools to help businesses write better code, improve productivity and support higher subscription pricing.

The concern now is different: if increasingly capable AI models can perform more business functions directly, some traditional software platforms may face tougher competition. That shift in perception means the current correction is not just profit-taking, but an attempt to separate companies that may lead the next phase of AI from those that could be disrupted by it.

Earnings season could set the next tone

European markets have also started the week cautiously as investors look ahead to the next corporate earnings season. Recent trading has shown a greater willingness to reduce exposure after a strong rally, particularly in companies where expectations are already high.

For now, the key question is whether earnings updates can support elevated technology valuations. If companies struggle to show that AI-related investment is translating into stronger revenue growth or margins, investors may become more selective across the sector.