Losses in the benchmark S&P 500 index and tech-heavy Nasdaq Composite endured their worst days since the fourth quarter of 2022.

Chief among concerns is the fear that spending by the leading cloud computing companies, often called hyperscalers, to win the race in artificial intelligence may have gotten out of control.

“Investors realize that the payoff is going to take time to materialize and the hyperscalers’ earnings are being hurt in the short term by how much they’re spending on it,” Alec Young, chief investment strategist at Mapsignals, told Bloomberg. 

Is the AI bubble bursting?

Going into earnings season, fund managers wanted to see some flesh on the bones of the AI euphoria.

Big Tech needed to demonstrate concrete examples of robust corporate profit growth to justify the recent multiple expansion that has stretched valuations to their breaking point. 

Even as bulls like Wedbush Securities analyst Dan Ives have argued the AI party is only just beginning, Nicholas Colas of DataTrek Research told Investors Business Daily in a July 12 article that expectations had run well ahead of reality.

Two days later, a would-be assassin narrowly missed killing Republican nominee Donald Trump at a rally, spooking markets.

“Current valuations imply earnings will double, and in some cases double again, at U.S. Big Tech companies,” he said, arguing companies like Tesla were trading more on faith than fundamentals.

Take Tesla, a company trying to rebrand itself as a leader in AI and robotics rather than an EV manufacturer, as a prime example.

It notched its biggest one-day drop since September 2020, plunging 12% after CEO Elon Musk revealed the EV inventory liquidation that drove stronger-than-expected Q2 delivery figures came at the direct expense of margins. 

OpenAI reportedly 12 months away from running out of money

Normally this wouldn’t faze bulls given Tesla’s $800 billion market cap rested predominantly on products and services still in their prototype development, such as its Optimus droid and full self-driving software stack. 

But the Aug. 8 robo-taxi event, expected to provide clear signposts, was postponed, with Musk informing investors they will have to wait until October 10th for clarity.

Meanwhile, the Tesla CEO failed to provide evidence a combination of FSD price cuts and free trials was translating to higher take rates.

When pressed about when his cars would finally be able to drive themselves without supervision, he resorted once more to dangling vague, noncommittal predictions that he could need another year.

For investors, the lack of a roadmap combined with steadily deteriorating fundamentals was too much to justify the enormous rally in the stock over this past month.

Even after yesterday’s losses, it is still up 9% since the start of July.

Meanwhile, Alphabet also said capital expenditures, mainly for new data center infrastructure, had hit $13 billion, up from $12 billion in the previous quarter. Moreover, spending on its robotaxi business would also increase. On Tuesday, Waymo co-CEO Tekedra Mawakana said her parent pledged to inject up to $5 billion to extend its runway. 

And if investors thought Microsoft affiliate OpenAI was poised to look any better, The Information reports that losses at the company behind ChatGPT could soar to as much as $5 billion this year alone.

Worse, without further financing from investors it might run out of funds in 12 months’ time. The company could not be reached by Fortune for a comment.

After weeks of repeated record highs, investors now appear to be taking money off the table and cashing in their chips especially after a turbulent fortnight during President Joe Biden dropped out of the race shortly after the attempt on Trump’s life.

Billionaire investor Ray Dalio, who made his fortune correctly predicting tectonic shifts in the global economy and geopolitical stage, emphasized the rising risks of a major conflagration on U.S. soil, especially should Kamala Harris win on election day.

“It is probable that we will see some form of civil war,” the founder of hedge fund Bridgewater wrote on Tuesday. “By the way, the markets are increasingly reflecting this shift.”