The Nasdaq 100 has suffered its worst quarter in nearly three years, slumping 8.3% amid growing fears of an artificial intelligence (AI) bubble. Already pressured by tariff uncertainties, government spending cuts, and recession threats, the tech-heavy index witnessed fresh selling after warnings about a potential slowdown in AI-driven infrastructure investment.

AI Stocks Bear the Brunt

Tech giants that once led the market’s rally have taken significant hits. NVIDIA Corp. (NVDA Quick QuoteNVDA - Free Report) has plunged 28% from its January peak, while Broadcom Inc. (AVGO Quick QuoteAVGO - Free Report) is down 33% from its December high. Other major players—including Microsoft Corp. (MSFT Quick QuoteMSFT - Free Report) , Amazon.com Inc. (AMZN Quick QuoteAMZN - Free Report) , Alphabet Inc. (GOOG Quick QuoteGOOG - Free Report) , and Meta Platforms Inc. (META Quick QuoteMETA - Free Report) — have all declined at least 20% from their respective records.

AI Investments Under Scrutiny

Tech companies have poured billions into data centers and AI chips to support the growth of AI models. However, concerns are mounting that the investment boom is outpacing demand. The DeepSeek threat made matters worse. Investors should note that DeepSeek, a Chinese startup developing AI models, grabbed headlines with the release of its new R1 model in late January.

According to Yahoo Finance, the company revealed that training the R1 model cost just $5.6 million, significantly less than the $100 million required to train OpenAI's GPT-4 model.This raises important questions about AI investment and the potential rise of more cost-efficient AI agents, which could disrupt the current market dynamics.

What Caused Investor Anxiety?

Investor jitters intensified last week when Alibaba’s co-founder cautioned that AI infrastructure growth is outstripping actual demand for AI services. This was followed by reports that Microsoft—despite earmarking $80 billion for data center expansion in 2024—had canceled certain projects in the United States and Europe due to oversupply concerns.

What Lies Ahead?

Despite the uncertainty, Microsoft, Alphabet, Amazon, and Meta remain committed to over $300 billion in capital expenditures for their current fiscal years. Despite the recent selloff, some analysts see buying opportunities.

Investors should note that the Nasdaq 100, which had more than doubled from its December 2022 low by February 2024, has been facing valuation concerns. Even after the recent pullback, the index remains elevated at 24 times estimated profits, above the two-decade average of 20 times, as quoted on Bloomberg.

But then, the Nasdaq 100 has seen a decline in its price-to-earnings (P/E) ratio (trailing 12 months) in recent months. It was 41.24X in early September 2024 while it fell to 29.27X at the end of March 2025. Melius Research analyst Ben Reitzes argues that a big-time AI beneficiary NVIDIA’s current valuation—at 23 times forward earnings—appears “defensive,” as quoted on Bloomberg.

Moreover, OpenAI reportedly expects its revenues to triple this year and is in discussions to raise up to $40 billion from investors, including SoftBank Group Corp.

Bottom Line

Although a cheaper valuation may boost the space, sentiments will likely remain moderately bearish. The industry saw mammoth investments last year that need time to come into fruition. Against this backdrop, investors with a strong appetite for risks may play Nasdaq-100-based exchange-traded fund (ETF) Invesco QQQ Trust, Series 1 QQQ. The ETF has a Zacks Rank #3 (Hold).