Meta and Alphabet have tacitly warned investors of a potentially major risk

There are signs that the markets are in trouble. While the economy is still doing relatively well and technology companies are reporting strong numbers, there is a risk that there could be weakness in the not too distant future. And I’m not just referring to the possibility of a recession.

Investments in artificial intelligence (AI) have helped many technology companies achieve significant growth and boost their valuations in recent quarters, but a slowdown in AI spending could also be the reason for its decline in the near future.

Are companies spending too much money on AI?

AI represents a hot new growth opportunity for many technology companies, and some are spending feverishly to avoid being left behind in the latest trend. Some CEOs of major technology companies have recently suggested that this may indeed be the case.

In a recent interview with Bloomberg, Meta-platforms (META -0.60%) CEO Mark Zuckerberg admitted, “There’s a significant chance that a lot of companies are going to overinvest now and you’ll look back and think, oh, maybe we all spent a few billion dollars more than we needed to.” Meta is definitely capitalizing on the excitement, integrating its own AI into its social media apps and its Ray-Ban smart glasses. And in the first six months of the year, the company’s revenue is up 25% to $75.5 billion.

alphabet (GOOG -1.28%) (GOOGL -1.24%) CEO Sundar Pichai also said during the company’s July 23 conference call with analysts that “when we go through a curve like this, the risk of underinvestment for us here is dramatically greater than the risk of overinvestment.” Alphabet has invested heavily in AI across all of its businesses, including in its chatbot Gemini, which aims to compete with the success of OpenAI’s ChatGPT. Alphabet, like Meta, has also seen demand increase this year due to a stronger advertising market and stable economic conditions. Its revenue for the first six months of 2024 totaled $165.3 billion — up 14% from the same period last year.

But the strong results should not lead investors to overlook the warnings from these leading companies about spending on AI, as they confirm the research firm’s data. Gardenerwhich estimates that at least 30% of generative AI projects could be abandoned by the end of next year, suggesting that companies are actually spending way too much money on AI.

A slowdown in spending may be inevitable

Companies have already made efforts to develop AI models and custom chatbots for their websites, but when it comes time to quantify and justify whether these projects were really worth it, this could lead to a reduction in spending, which would be bad news for the markets.

And if companies rush to cut their AI spending, it could lead to lower spending in other areas, including advertising and all technology-related spending. For Alphabet, Meta Platforms and other growth stocks, that could mean a slowdown in their growth rates, even if they aren’t making next-generation AI chips.

Are AI stocks facing a major correction?

Many investors today justify paying high multiples for AI stocks because of their promising growth prospects. But the risk is that these expectations do not match reality, at least not in the near future. AI may destroy some jobs and take over others, but that does not mean that every investment in AI is worthwhile.

Investors should not ignore these recent warnings from Zuckerberg and Pichai, as there could be a reduction in spending on AI and technology in the coming months, leading to more bearish conditions for highly valued AI stocks. While that doesn’t necessarily mean all AI stocks are bad buys today, investors should be wary of those trading at outrageously high earnings multiples. And with a recession potentially on the way soon as well, there may be more reason than ever for investors to temper their expectations for tech stocks overall, as their returns could be limited in the near term.