The AI Boom’s Potential Bust: Is the Nasdaq 100 Facing a Tech Bear Market?
The relentless surge of the AI trade in U.S. Equities may be losing steam, according to David Woo, founder of David Woo Unbound and former Bank of America strategist. His analysis suggests a critical turning point may be at hand, potentially signaling a deeper downturn for the tech sector.
Nasdaq 100: A Period of Consolidation
Since October, the Nasdaq 100, as tracked by the Invesco QQQ Trust (NASDAQ:QQQ), has experienced a period of stagnation. Woo points out that its 100-day rolling return is converging towards zero, a pattern not seen since the COVID era. This consolidation, he warns, could be the calm before a more significant correction.
Underlying this trend is eroding leadership within the index. Currently, only half of the Nasdaq 100 stocks are trading above both their 100-day and 200-day moving averages. Even the “Magnificent 7” – the tech giants that have driven much of the market’s gains – have broken key trend lines and fallen below their 100-day moving averages.
Earnings Momentum and the Retail Investor
As the fourth-quarter earnings season unfolds, Woo observes a concerning trend: the combined earnings before interest and taxes of the Magnificent 7 are slowing, reaching their lowest level since 2023, despite a rebound at Apple. This suggests that the earnings growth that fueled the AI trade is losing momentum.
Retail investors have repeatedly intervened to prop up the market, acting as “white knights” and rescuing the AI trade at least five times in the past year. For example, following Microsoft’s earnings release in January, a surge in retail buying, as reported by Charles Schwab, helped to stabilize the stock. However, Woo questions how long this support can last.
The Breakdown of Capex and AI Stock Correlation
Historically, hyperscaler capital expenditure (capex) has been a key driver of the AI trade, with investors viewing capex as a proxy for future returns. Woo, however, has long been skeptical of this assumption. He initiated a short position on the Nasdaq 100 in September and maintains that position.
Recent earnings reports reveal a critical shift: the correlation between AI stocks and capex has broken down, even turning negative. For the first time in three years, hyperscaler stocks declined on announcements of increased capex spending. Woo calls this a “watershed moment,” suggesting the market no longer trusts higher capex to translate into higher returns.
Capex as a Cost Problem, Not a Return Signal
Woo believes the market is beginning to view rising capex as a cost problem rather than a positive return signal. The escalating costs associated with AI infrastructure – including high-bandwidth memory chips, transformers, cooling systems, construction materials, grid upgrades, land prices and specialized labor – are putting pressure on profitability.
He suggests that hyperscalers are driven more by “fear” of falling behind than by a clear understanding of AI’s potential profitability. This, he argues, is “almost a guarantee of over-investment.”
Is the Music Stopping?
Drawing a parallel to Chuck Prince’s infamous 2007 comment about the music continuing as long as it plays, Woo warns that the semiconductor bull cycle is historically extended and market psychology towards capex is shifting. His concern isn’t the technology itself, but rather the potential for the investment cycle to outpace the revenue cycle.
Woo remains short the Nasdaq 100, viewing the bursting of the AI bubble as a significant macro risk heading into 2026. He believes that when the market correction arrives, there will be limited safe havens.
Frequently Asked Questions
Q: What is the Nasdaq 100?
A: The Nasdaq 100 is a stock market index that includes the 100 largest non-financial companies listed on the Nasdaq stock exchange.
Q: What is capex?
A: Capex, or capital expenditure, refers to a company’s investments in fixed assets, such as property, plant, and equipment.
Q: Who is David Woo?
A: David Woo is an American economist and investment strategist, currently the CEO of David Woo Unbound and formerly the Head of Global Rates and Foreign Exchange Research at Bank of America Merrill Lynch.
Q: What are the “Magnificent 7”?
A: The “Magnificent 7” refers to the seven largest technology companies: Apple, Microsoft, Alphabet (Google), Amazon, Nvidia, Tesla, and Meta (Facebook).
Did you know? David Woo’s book, Merry-Go-Round Broke Down, co-written with Margalit Shinar, will be published on March 31, 2026.
Pro Tip: Diversification is key. Don’t put all your eggs in one basket, especially during periods of market uncertainty.
Stay informed about market trends and consider consulting with a financial advisor before making any investment decisions.
