AI stocks had a difficult week, and talk of a bursting bubble spread quickly. The S&P 500 fell 1.8% on Friday, its worst day since June. Intel dropped about 30%, its steepest fall since 1974. The Nasdaq closed October with its worst month since March 2025. The data so far point to something less dramatic, though the picture could still change.
China experienced the steepest decline
China saw the sharpest fall, and some investors there already describe it as a burst. The STAR50 index of Chinese AI and chip companies has lost about 40% in under four months, erasing around $480 billion. China’s main blue-chip index is down about 20% from its June high. Even so, the STAR50 still trades at roughly 100 times past earnings, so further losses are possible. Some banks see buying opportunities at these levels. Whether China’s fall proves to be a burst or a deep correction may only become clear in due course.
Big tech results sparked the US selloff
In the US, the selling followed results from the largest tech companies. Alphabet had its worst day on record after saying it burned through more cash on AI. Amazon’s spending over the past year ran $42.4 billion ahead of the cash its business generated. Intel gave a sales forecast well below expectations for the last three months of the year.
Demand for AI services, however, appears to be still growing. Amazon’s cloud business grew 39% to $46 billion, its fastest pace in nearly five years. Its customers have signed contracts worth $578 billion in future revenue. Microsoft’s Azure cloud sales rose 48%. However, these figures come from the companies themselves, and growth forecasts for 2027 and beyond may not be met.
Investors seem more worried about the cost of AI than about demand for it. Amazon plans to spend about $220 billion this year and more in 2027. Alphabet will stick to its current spending plan, Meta raised the bottom of its range, and Microsoft trimmed its plan because external capacity was not met in time. Meta and Alphabet joined Amazon in spending more than their businesses bring in.
The wider US market held up better than the headlines suggested. Over the week, the S&P 500 fell 0.6% and the Nasdaq 2%. Smaller companies in the Russell 2000 rose 1.3%, and the average S&P 500 stock gained for a fourth straight week. The Nasdaq 100 ended 9.1% below its record, close to the 10% fall usually called a correction. Most companies beat profit estimates, but by much smaller margins than usual. On current evidence this looks closer to a correction than a crash, though one more bad week could potentially change that. Nvidia’s upcoming results may offer the next clue.
Higher US rates could add pressure
US interest rates may add to the pressure. The Federal Reserve held rates at 3.75% to 4.00%, but two members voted for a rise. Markets reportedly see about a 70% chance of a hike at the 9 December meeting. AI companies are borrowing heavily to build data centres, so higher rates would raise the cost of that build-out.
What does this mean for Sri Lanka?
Sri Lanka’s exposure is likely to come through US interest rates and global risk appetite. Few technology companies are listed on the Colombo Stock Exchange, so direct exposure to AI stocks is small. A Fed rate rise in December would keep global borrowing costs high, which could draw money away from emerging markets.
IT and business-process exports are Sri Lanka’s closest link to the AI boom. The sector depends on how much foreign firms spend on technology. Last week’s results suggest that spending is still rising for now. A sharp pullback by big tech would pose the main risk to the sector.