Hedge funds and other institutional investors are reassessing the sustainability of the artificial intelligence investment boom after a sharp selloff in the technology sector wiped nearly $800bn from the combined market value of the so-called Magnificent Seven, according top a report by Bloomberg.
The group of major US technology companies fell 4.8% on Thursday, marking its steepest one-day decline since the market turmoil triggered by US tariff announcements in April 2025. The selloff dragged the S&P 500 down 1.2%, while the Nasdaq 100 fell 1.9%.
The latest pressure on the AI trade followed earnings updates from Alphabet and Tesla, which raised fresh concerns over the scale of capital spending required to build out artificial intelligence infrastructure and whether those investments will generate sufficient returns.
Alphabet said it expects capital expenditure of as much as $205bn this year, while Tesla chief executive Elon Musk described 2026 as a year of substantial investment for the electric vehicle maker. Tesla shares fell 15% on Thursday, while Alphabet dropped 7.1%.
The results have added to growing investor scrutiny of the enormous sums being committed to AI data centres, chips and related infrastructure. The Magnificent Seven index has now fallen 11% from its late-May peak, erasing approximately $2tn in market value.
The selloff also comes against a more challenging macroeconomic backdrop, with rising oil prices and renewed conflict involving Iran adding to concerns over inflation, growth and the outlook for global markets.
Alphabet’s results highlighted the tension facing the sector. Although the company reported strong cloud growth, its spending plans exceeded expectations. The company spent $45bn on capital expenditure during the second quarter, pushing its cash flow into negative territory for the first time since becoming a public company.
The shift has raised questions over whether investors should continue to value the largest technology companies primarily as highly cash-generative businesses, or increasingly as capital-intensive infrastructure plays.
Tesla’s results added to the pressure on the broader AI and technology complex, with Musk telling investors the company should accelerate capital spending while avoiding wasteful investment.
Other major AI spenders also declined, with Amazon falling 4.6%, Meta Platforms dropping 3.4% and Microsoft losing 2.2%. All three companies are due to report earnings next week, potentially giving investors further insight into the scale of spending required to compete in AI.
Apple, which has been less aggressive than its peers in committing capital to AI infrastructure, suffered the smallest decline among the Magnificent Seven. The company’s shares have risen 11% this month and 18% so far this year.
The shift in sentiment represents a significant change for the AI trade. For much of the past three years, investors have rewarded announcements of higher spending by the biggest technology companies, betting that the investment would translate into long-term growth.
That tolerance now appears to be weakening, with investors demanding clearer evidence that rising expenditure will produce commensurate returns.
The change is likely to remain a key consideration for hedge funds and other investors positioning around the technology sector, particularly as rising capital requirements, uncertain monetisation prospects and increased borrowing commitments potentially alter the risk profile of the companies that have driven equity market returns in recent years.
