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Three ways the AI boom may fizzle - and what happens to stocks next
Stocks are seeing a little wobble. Early futures action on Monday showed the S&P 500 may struggle to recover much of Friday's 1.2% drop.
But that still leaves Wall Street's main equity barometer just a fraction below this month's fresh record high. Many observers have said that, for the market to really crack, investors must seriously start doubting the longevity and intensity of the AI trade.
Joachim Klement and Francisca Reis, strategists at Panmure Liberum, the U.K.'s biggest independent in
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Stocks are seeing a little wobble. Early futures action on Monday showed the S&P 500 may struggle to recover much of Friday's 1.2% drop.
But that still leaves Wall Street's main equity barometer just a fraction below this month's fresh record high. Many observers have said that, for the market to really crack, investors must seriously start doubting the longevity and intensity of the AI trade.
Joachim Klement and Francisca Reis, strategists at Panmure Liberum, the U.K.'s biggest independent investment bank, have laid out three ways the AI trade may fizzle and the impact those scenarios could have on stocks.
The first is what they called correcting the excess, in which U.S. tech investments would see a small drop of about 4.5% - roughly $66 billion or 1/10th of the capex that hyperscalers plan to spend in 2026.
"That is roughly the growth we have seen in Q4 2025, so it simulates a scenario where the big hyperscalers admit that their investment plans were excessive and cut back on them while markets normalize their growth expectations," the Panmure duo said in a note last week.
Panmure said it expects the S&P 500 SPX to fall around 15% in the year following the correction in tech investment, but with tech-hardware stocks possibly dropping 35% and software stocks by 21%. And because autos are dominated by Tesla (TSLA), which behaves like a tech stock and is sensitive to changes in investor sentiment of high-growth companies, that sector may drop more than 30%.
"Sectors that are likely to be less affected than the market are consumer services (fast-food restaurants, casinos, etc.), media (broadcasting, videogames) and energy," said Panmure.
The second scenario is a regular tech-investment recession, involving a two-standard-deviation fall in U.S. tech capex, which at current annual spending rates equates to an $88 billion reduction in spending - or a 6% drop.
That would correspond to a deeper-than-normal U.S. recession with a significant reduction in earnings expectations by equity investors. In this scenario, the S&P 500 may slide almost 20%, which is near a bear market.
Tech hardware stocks may halve in value, similar to what investors experienced in the sector during the 2008-09 global financial crisis, while software stocks and retail are likely to fall 25% to 30%, Panmure said. "General recession fears should hit industrials, financials, and real estate. Once again, consumer services, media and energy are the more resilient sectors according to our analysis."
The third scenario is a repeat of the burst of the dot-com bubble, in which U.S. tech investments drop 11%, equivalent to the reduction in tech capex in the first year after the market's early 2000 peak. Panmure said it isn't confident that the investment reduction would extend a second year, as it did in 2002, partly because the Federal Reserve would be more likely to step in to support the economy, it said.
Still, the S&P 500 could decline about 30%, similar to the pullback in the fall of 2001, with tech hardware stocks becoming the biggest losers, tumbling 74%. "For comparison, in the first year of the TMT crash until the 9/11 terror attacks, tech hardware stocks in the S&P 500 dropped 70.6%. The maximum drawdown for the sector during the extended bear market turned out to be 86%," said Panmure.
In summary, Panmure said that, because the most expensive sectors are also those with the closest link to the AI boom, "if the AI theme were to crash, we should expect more expensive sectors to crash harder than cheaper ones. Value will likely be a good strategy to follow in this scenario."
The markets
U.S. stock-indices SPX DJIA COMP were higher at the opening bell on Wall Street as Treasury yields BX:TMUBMUSD10Y dipped to just below recent highs. The dollar index DXY was lower, while gold futures (GC00) traded around $4,577 an ounce.
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The buzz
U.S. crude futures (CL.1) were approaching $110 a barrel at one point early Monday, after President Donald Trump said in a social-media post that Iran must agree to a peace deal fast "or there won't be anything left of them." But crude prices have pulled back on a report the U.S. may temporarily lift oil sanctions on Iran.
Soybean (S00), corn (C00) and wheat (W00) futures jumped after the White House said China will buy at least $17 billion in U.S. agricultural products annually.
Activist investor Elliott Investment Management has built a sizable stake in Bio-Rad Laboratories (BIO), according to The Wall Street Journal.
Shares of Dominion Energy (D) were jumping after it agreed to be acquired by NextEra Energy (NEE), in an all-share deal that will create the world's largest regulated electric utility business.
Nvidia (NVDA) will be the earnings highlight this week, but investors will also be eager to hear results from big retailers like Home Depot (HD), Target (TGT) and Walmart (WMT), which could gauge how consumers are faring.
U.S. economic data due Monday includes the National Association of Homebuilders Index for May, to be released at 10 a.m. Eastern.
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