Alphabet stock drops as investors fear the AI bubble could pop and hurt the whole economy

What's behind the worry?

For years, some of the biggest names in AI have been investing large sums of money into smaller startups. Those startups then use that same money to buy cloud computing services and other products from the very same big companies. This is called circular financing — it's like passing the same dollar back and forth between your left and right pocket while pretending you're getting richer.

The Wall Street Journal has warned about what it calls a "tangled web of AI bets," saying that if this bubble were to burst, the consequences could be severe ¹. A lot of the money behind the AI industry is borrowed — meaning companies are running on debt. If demand for AI services slows down or an economic downturn hits, that debt could become impossible to pay .

The warning signs are everywhere

Last week, Alphabet saw the largest single-drop in its market value in company history, wiping out well over half a trillion dollars in value ¹. That kind of move doesn't just shake tech stocks — it rattles the whole market, since the AI sector is now seen by many as a major pillar of the US economy .

Beyond Alphabet, other red flags are popping up. NVIDIA's customer CoreWave, a data center operator that analysts have called the "AI trade's canary in the coal mine" — a phrase meaning it's one of the first to show trouble before everyone else feels it — has seen its shares fall steadily over several months ¹.

Despite all of this, data center construction is still accelerating at an unprecedented pace, even as lawmakers from both major US political parties push back ¹.

The worry is spreading overseas too

In Asia, the unease is growing as well. The Bank of Korea recently warned about a "semiconductor version of Dutch disease" — an economic condition where one booming industry becomes so dominant that it crowds out and weakens all other parts of the economy ¹.

Yet South Korea is doubling down anyway. President Lee Jae Myung pledged to "boldly invest in AI and future growth engines," effectively planning to double AI and semiconductor spending next year ¹.

Only time will tell whether that gamble pays off or makes things worse. The more investors watch this circular money flow, the more they wonder: who is really buying all this AI infrastructure, and at what point does the music stop?

This story reports on a trend for information only. It is not advice or encouragement to do any of it.

Key facts

• Alphabet suffered its biggest ever drop in market value, losing well over $500 billion
• Big AI companies invest in startups that then buy services from those same companies — a pattern called circular financing
• Much of the AI sector's funding is based on debt, raising the risk if demand falls
• South Korea is doubling AI and chip spending despite warnings about economic imbalance

Sources

1. Investors Are Getting Palpably Nervous About the AI Industry's Financial Situation — futurism.com