AI Market Shakeout Threatens Smaller Stocks First

Wall Street expert Aswath Damodaran says the next major artificial intelligence market shakeout will hit smaller companies the hardest. While tech giants pour billions into infrastructure, firms with less cash face the biggest risks.

Damodaran points out that returns on invested capital are dropping quickly at major tech firms like Meta, Alphabet, and Microsoft. Even so, he notes that these large corporations have the cash flow and balance sheet strength to survive a downturn.

Smaller artificial intelligence firms lack that financial cushion. Recent hedge fund troubles show how fast sentiment can shift in this sector. Investors should watch lesser known stocks closely as market pressure builds.

Not everyone agrees on what the spending slowdown means for the market. Some analysts view widespread caution as a bullish sign that the cycle still has room to run. Traders will need to watch upcoming corporate earnings to see if spending continues to outpace revenue growth.