Why is the market going down because of AI if AI is so smart?

There is a strange paradox going on in the American market right now: we are in the epicenter of a technological breakthrough, but the indices are feverish. Moreover, sectors that are as far away from neural networks as possible are falling "in company" with bigtech. It seems that we are witnessing a phase of hard sobering, writes German Kaplun, co-founder and strategy director of TMT investments, on his Facebook page.

The main driver of the decline is that investors are suddenly laying down the risk of disrupting margin-, commission-, and labor-intensive business models in several industries at once. In recent days, this has been described as the spread of "AI fear" from software onward: brokers/financial intermediaries, real estate services, logistics and transportation. In capitalism, profit is taken from scarcity and complexity, and AI makes creating content, code and analytics frighteningly cheap. If your competitor is doing a job 10 times faster with a chatbot, you'll both end up just lowering your prices so you don't go out of business. Turnovers are the same, and margins melt away.

At the same time, there is a risk for those who financed all this - funds and banks. If companies' margins are squeezed by AI deflation, there will be nothing left to service their debts, and return on investment for shareholders will be a mirage. When this is layered on top of "expensive refinancing" and expectations that the Fed will be slow to cut rates, the cocktail becomes truly toxic.

And here is the main figure that takes your breath away. The four giants - Amazon, Google, Meta and Microsoft - will spend about $650 billion on AI infrastructure in 2026. A 70% year-on-year growth. Amazon alone is going for $200 billion - and is already going into negative free cash flow. A huge AI capex on the back of expensive credit is a direct hit to the cash register right now, with a payoff sometime later.

However, this is where big politics comes into play. If the Fed does go for aggressive easing under pressure from the White House, the market may turn around in one trading session.

States will inevitably come in for their share to patch holes in budgets, but that's a future issue, and capex bills need to be paid today.

In my opinion, this is still not a dotcom-style crash, but just a deep and painful correction. Unlike in 2000, today's giants have real cachet and working infrastructure. We're going through a filter: the market is weeding out those whose margins were held by inefficiencies that AI will nullify. Once the betting cycle decisively turns, fear will be replaced by greed again - but it will be a very different, "more mature" market.

This article was AI-translated and verified by a human editor