China's AI stock crash erases $480 billion; US markets now face test

The Chinese AI stock surge has collapsed, eliminating roughly $480 billion after the STAR50 index, which covers AI and semiconductor firms, dropped 40% from its July peak.

American AI stocks have experienced a far lighter setback so far. The Nasdaq is approximately 6% below the record it achieved three weeks ago. This week's results from Big Tech will determine whether that difference persists.

How China’s AI Bubble Burst

Analysts have cited overpriced valuations, tax liabilities, and the possibility of US restrictions on Chinese data-center hardware.

The damage is widespread. According to Goldman Sachs, AI stocks make up 42% of China's market value and 57% of its trading volume.

The broader CSI 300 index, which tracks China's largest corporations, entered a bear market last week, as reported by BeInCrypto.

“The stock market later evolved into a speculative crazy bull. And now we see the bubble bursting,” said Dong Baozhen, a Beijing-based fund manager, as cited by Reuters.

Even after the rout, the STAR50 trades at about 100 times trailing earnings. The Nasdaq 100 is at about 30 times.

Why This Week Could Decide the US AI Trade

Microsoft and Alphabet are set to report on Wednesday after market close, a few hours after the Federal Reserve's rate decision at 2 p.m. ET. Amazon publishes on Thursday, as outlined in BeInCrypto's Big Tech earnings preview.

Alphabet expects to spend between $195 billion and $205 billion on chips and data centers in 2026. Amazon anticipates spending about $220 billion. Both companies now deploy more cash than they generate from operations.

Cloud revenue is the return that investors are seeking. Microsoft guided for 44% to 45% growth at Azure, its cloud division. Google Cloud posted 82% growth in the prior quarter.

Goldman Sachs analyst Gabriela Borges believes investors will focus on Azure's return on invested capital. Alphabet fell 7.1% after its July earnings despite beating earnings estimates.

Amazon CEO Andy Jassy has noted that even with higher spending, the company will not be able to meet all demand this year.

Morgan Stanley forecasts an additional 10% to 15% decline for offshore Chinese equities before China’s stocks bottom. In the US, all three companies have lagged the S&P 500's 11% gain so far this year as they head into their reports.