Is the AI rally running out of steam?

Investing.com -- Capital Economics told clients in a note Wednesday that the recent selloff in AI-linked tech giants is being driven by fear rather than hard evidence, and it expects the rally to resume, at least for now.

Chief Economic Adviser John Higgins outlined several sources of pressure weighing on the shares.

One is the prospect of greater memory chip supply from Chinese heavyweights such as CXMT, which listed on Monday.

That may not lift supply of the high-bandwidth memory prioritized for AI, but Higgins said it could ease a shortage of mainstream memory chips and, if prices fell, undermine the revenue of the big U.S. and Korean memory makers.

Another worry is said to be China's progress in the AI arms race. Capital Economics noted that news of China producing its own deep ultraviolet lithography machines has hit ASML shares, even though the Dutch firm's extreme ultraviolet machines are far more advanced.

Chinese labs training near-frontier models at lower cost have also raised questions about whether U.S. hyperscalers can monetize their investments.

The firm added that reports Nvidia may provide about $250 billion in financing guarantees for OpenAI have revived concerns about "circular finance" in the AI rollout.

Capital Economics still expects the "AI train" to get back on track, with an end-2026 S&P 500 forecast of 8,250.

Longer term, however, it thinks earnings expectations that "look exceptionally optimistic" will be scaled back, forecasting the index to fall to 6,500 by end-2027.

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