AI sector faces reckoning as inflation, China rivalry test profitability

AI stocks suffered sharp weekly declines, with the SOXX index falling nearly 9% and major memory chip makers dropping over 5% on Wednesday, driven by inflation fears and new Chinese competition. US inflation rose 3.7% year-over-year in September, strengthening expectations of a Federal Reserve rate hike, while China's CXMT announced a new memory chip, reviving overproduction concerns for 2029. These cyclical pressures compound existing doubts about profitability, as hyperscaler capital spending could exceed $1.2 trillion by 2027, and revenue estimates for OpenAI and Anthropic have been revised downward. Despite the turbulence, infrastructure providers still benefit from tangible orders, and analysts argue spending cuts could jeopardize future positions in an "AI or die" environment. The sector is entering a more selective phase where the key question is how far markets can value AI transformation before financing constraints become a drag.