By Jamie Chisholm
A pullback in big tech capex may rattle markets
The AI trade has powered stocks to record highs.
Stocks are having a little wobble. Early futures action on Monday shows the S&amp;P 500 may add to Friday's 1.2% drop as higher oil prices underpin Treasury yields.
But that still leaves Wall Street's main equity barometer just a fraction below this month's fresh record high. Many observers believe that for the market to really crack, investors must seriously start doubting the longevity and intensity of the AI trade.
Joachim Klement and Francisca Reis, strategists at Panmure Liberum, the U.K.'s biggest independent investment bank, have laid out three ways that the AI trade may fizzle, and the impact those scenarios could have on stocks.
The first is what they term correcting the excess, in which U.S. tech investments would see a small drop of about 4.5% - roughly $66 billion or one tenth of the capex that hyperscalers plan to spend in 2026.
&#34;That is roughly the growth we have seen in Q4 2025, so it simulates a scenario where the big hyperscalers admit that their investment plans were excessive and cut back on them while markets normalize their growth expectations,&#34; said the Panmure duo in a note that published last week.
Panmure sees the S&amp;P 500 SPX falling around 15% in the year following the correction in tech investment, but with tech hardware stocks possibly dropping 35% and software stocks by 21%. And because autos are dominated by Tesla (TSLA), which behaves like a tech stock and is very sensitive to changes in investor sentiment about high-growth companies, that sector may drop more than 30%.
&#34;Sectors that are likely to be less affected than the market are consumer services (fast-food restaurants, casinos, etc.), media (broadcasting, videogames) and energy,&#34; said Panmure.
Scenario two is a regular tech-investment recession, involving a two-standard-deviation fall in U.S. tech capex, which at current annual spending rates equates to an $88 billion reduction in spending or a 6% drop.
That would correspond to a deeper-than-normal U.S. recession with a significant reduction in earnings expectations by equity investors. In this scenario, the S&amp;P 500 may slide almost 20%, near to a bear market.
Tech hardware stocks may halve in value, similar to what investors experienced in the sector during the 2008/09 financial crisis, while software stocks and retail are likely to fall 25% to 30%, Panmure said. &#34;General recession fears should hit industrials, financials, and real estate. Once again, consumer services, media and energy are the more resilient sectors according to our analysis.&#34;
The third scenario is a repeat of the dot-com bubble bursting, in which U.S. tech investments drop 11%, equivalent to the reduction in tech capex in the first year after the market's early 2000 peak. Panmure isn't confident that the investment reduction would extend to a second year like it did in 2002, partly because it believes the Federal Reserve would be more likely to step in to support the economy.
Still, the S&amp;P 500 could decline about 30%, similar to the pullback into the fall of 2001, with tech hardware stocks becoming the biggest losers as they tumble 74%. &#34;For comparison, in the first year of the TMT crash until the 9/11 terror attacks, tech hardware stocks in the S&amp;P 500 dropped 70.6%. The maximum drawdown for the sector during the extended bear market turned out to be 86%,&#34; said Panmure.
In summary, Panmure thinks that because the most expensive sectors are also those with the closest link to the AI boom, &#34;if the AI theme were to crash, we should expect more expensive sectors to crash harder than cheaper ones. Value will likely be a good strategy to follow in this scenario.&#34;
The markets
U.S. stock-index futures (ES00) (YM00) (NQ00) are lower as Treasury yields BX:TMUBMUSD10Y hold near recent highs. The dollar index DXY is a tad lower, while gold futures (GC00) are trading around $4,545 an ounce.
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The buzz
U.S. crude futures (CL.1) were approaching $110 a barrel again early Monday, after President Donald Trump said in a social-media post that Iran must agree to a peace deal fast &#34;or there won't be anything left of them.&#34;
Soybean (S00), corn (C00) and wheat (W00) futures jumped after the White House said China will buy at least $17 billion in U.S. agricultural products annually.
Activist investor Elliott Investment Management has built a sizable stake in Bio-Rad Laboratories (BIO), according to The Wall Street Journal.
Dominion Energy shares (D) are jumping after a report that NextEra Energy (NEE) is in talks to acquire its Virginia-based peer.
Nvidia (NVDA) will be the earnings highlight this week, but investors will also be eager to hear results from big retailers like Home Depot (HD), Target (TGT) and Walmart (WMT) to get a gauge on how the consumer is faring.
U.S. economic data due Monday include the National Association of Homebuilders Index for May, to be released at 10 a.m. Eastern.
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The chart
Source: Miller Tabak
Matt Maley, chief market strategist at Miller Tabak, notes that the PHLX Semiconductor ETF SOX has become &#34;extremely overbought,&#34; with its weekly relative strength index - a momentum gauge - at 86 and a price over 150% above its 200-week moving average. Indeed, &#34;the RSI reading is the highest since 2000, when it reached 89,&#34; he says. &#34;So, although there has been one time when the chip group has become even more overbought before it has topped out for a while, it has not been much more overbought...even in the biggest tech bubble in history.&#34;
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05-18-26 0707ET

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The AI boom may face challenges that could impact stock markets, according to strategists at Panmure Liberum. They outline three scenarios: a correction in tech investments leading to a 15% drop in the S&P 500, a tech-investment recession causing a near 20% decline, and a potential repeat of the dot-com bubble burst resulting in a 30% fall. The report suggests that sectors closely tied to AI could suffer the most, while consumer services and energy may remain resilient.

- A potential pullback in big tech capital expenditures could impact stock markets, particularly if doubts arise about the sustainability of the AI trade.  
- Strategists from Panmure Liberum outline three scenarios: a modest 4.5% drop in tech investment may lead to a 15% decline in the S&P 500, while a severe tech recession could trigger a near 20% slide.  
- The third scenario suggests an 11% reduction in tech spending, similar to past market downturns, which could see tech hardware stocks plummet 74%, emphasizing the risks in high-valued sectors linked to AI.

Three ways the AI boom may fizzle and what happens to stocks next