SpaceX’s shares took a big hit last week, ending the week at 124 at the NASDAQ close on Friday. This is more than eight percent below the 135 price at its initial public offering last month, and a drop of almost 15 percent for the week. That corresponds to a loss of more than $200 billion in market capitalization. The Friday close was more than 40 percent below the peak price of 211 hit in the week after the IPO.

SpaceX was hit with some bad news last week, notably a rocket launch on Thursday that had to be aborted. But the company’s troubles may go beyond one failed rocket launch. The company’s stock had been falling for the last three weeks. It’s possible that investors have less confidence that Musk will be turning around a massive money loser into one of the most profitable companies in the history of the world.

Also, the lock-in period for insiders will likely be ending soon. This means that a lot of shares will be dumped by people looking to cash out big gains.

SpaceX wasn’t the only high-flyer seeing some rocky waters. The price of Tesla, Musk’s other big company, fell by 6.6% last week, reducing its market capitalization by $100 billion from the week before.

And it wasn’t just Musk’s companies that had troubles. The big chipmakers all had bad weeks. Nvidia’s stock price dropped 3.9 percent last week, shedding $200 billion in market value. Broadcom’s valuation fell by $140 billion, 7.3 percent of its market value, and shares of both Micron and AMD fell by more than 10 percent.

It’s always hard to say what information moves markets, but there is a clear candidate this week. The Chinese AI company Moonshot unveiled a new model that scores right alongside the top models from OpenAi and Anthropic. The problem for the U.S. AI companies, and the hyperscalers providing the computing power, as well as the chip manufacturers, is not just that China’s leading AI companies can match the power of the U.S. leaders, but also that they sell their product at a fraction of the price.

As noted before, the story of a huge payoff to AI firms rests on three big assumptions, all of which look increasingly questionable. The first and most important is that there will be a massive payoff from AI in the form of an increased rate of productivity growth. To date, we see no evidence of this. Productivity growth has been very weak in the last three quarters. (I’m including the second quarter of 2026 based on estimates of GDP growth and the data we have on hours worked.)

The second is that competition will not push down prices, allowing the benefits of the AI productivity boost to be widely shared by society rather than being locked in as extraordinary profits for the AI makers. The third assumption is that the U.S. AI companies will be the ones getting the big profits.

The latest developments in Chinese AI make both the second and third assumptions very questionable. The Chinese companies are prepared to compete on price, offering a far lower cost product that will be fine for the needs of almost all users. This means both that the profits of AI companies are likely to be limited even if there prove to be massive productivity gains.

Remember, this is the story of Internet providers. Verizon and Comcast are big profitable companies, but they are not earthshaking giants. If Anthropic and OpenAI end up being the Verizons and Comcasts of the next decade, their shareholders will be looking at huge losses. And given the progress of the Chinese AI companies, they may prove fortunate even to achieve the status of the big Internet providers, as Chinese companies are dominating not just third markets, but increasingly the U.S. market as well.

If this story proves to be right, and there is no pot of gold at the end of the AI rainbow, it’s hard to say how long it will take markets to catch up. The Internet bubble took two and a half years to deflate. The financial problems associated with the collapse of the housing bubble also took a long time to percolate through the system.

Nationwide house prices peaked in the summer of 2006, but the stock market continued to rise at a healthy pace through most of 2007. Even the stocks of the soon-to-be-bankrupt companies fared well until near the end. AIG still had a market capitalization of almost $180 billion at the end of 2007, and even in the summer of 2008, just months before its collapse, its market capitalization was over $70 billion.

While markets may be forward-looking, they don’t always see things with clear eyes. There might be some way that the big bets on the AI companies, the hyperscalers, and the chip makers make sense, but it is difficult to see what it is at this point.

Dean Baker is a senior economist at the Center for Economic and Policy Research and the author of the 2016 book Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer. Please consider subscribing to his Substack.