Mag 7 selloff deepens as Nvidia drops 5% on AI spending fears

The Magnificent Seven tech stocks are under pressure as investors grow impatient with the lack of returns from hundreds of billions in AI infrastructure spending, triggering a rotation into other sectors.

The selloff, reported by Jay Mehta on July 29, has seen traders move out of mega-cap technology names into sectors with clearer near-term earnings visibility. Nvidia Corp., the bellwether for AI spending, dropped 5% to $196.51 in the prior session, losing its status as the world's most valuable company to Apple Inc., according to Bloomberg data.

"The market is asking a simple question: when do these AI investments start generating returns that justify the scale of spending?" said a strategist at a New York-based research firm. "Until we see concrete evidence, the overhang will persist."

The circular financing debate

At the center of the selloff is growing scrutiny of what critics call "circular financing" in the AI supply chain. Nvidia has announced more than $540 billion in similar deals this year alone, including a partnership with South Korea's SK Group valued at over $500 billion and discussions to backstop as much as $250 billion to help OpenAI lease computing power, Bloomberg reported. The chipmaker also committed $5 billion to Safe Superintelligence Inc., the AI startup co-founded by former OpenAI chief scientist Ilya Sutskever.

The concern, articulated by Goldman Sachs Group Inc. and investor Michael Burry in recent months, is that Nvidia's practice of financing and taking stakes in companies that then use its chips may be artificially inflating demand. The cost of protecting Nvidia's debt against default surged by a record 0.14 percentage point to 0.82 percentage point annually, showing growing unease among credit investors.

Global spillover

The selloff has spilled into global markets. South Korea's KOSPI index plunged 10.84%, triggering a circuit breaker for the eighth time this year, and is now down more than 33% from its highs in less than a month, highlighting the global reach of the AI-driven selloff. Nvidia's deepening ties with SK Group — including a joint effort to build more than 2 gigawatts of AI data centers on the Korean Peninsula — have exposed the region to the same circular financing concerns.

The next major catalyst for the sector comes in the weeks ahead, when Nvidia reports its quarterly earnings. Analysts will be watching for any signs that data center revenue growth is decelerating or that customers are pushing back on pricing.

This article is for informational purposes only and does not constitute investment advice.