A wave of concern has gripped market professionals after notable developments in the technology sector highlighted potential cracks in the artificial intelligence (AI) investment narrative. Driven initially by the AI boom, the stock bull market remains sturdy, with the S&P 500 only slightly below its record. Yet, AI-related stocks are on shaky ground, with some already entering a bear market phase.
On the heels of a pivotal week, investors are scrutinizing whether the returns on AI investments are manifesting quickly enough to justify the substantial build-outs. Notably, Anthropic, a frontier algorithm developer, recently filed a public document shedding light on slowing revenue growth from the second to third quarter. This coupled with big tech earnings reports indicating a tightening on capital expenditures has pointed to potential limits on the demand for computing power and raised questions about the sustainability of AI spending.
Amid these revelations, the Global X Artificial Intelligence & Technology ETF recorded a 4% drop this week, increasing its total losses for October to 8% and currently sitting 15% off its summer peak. Similarly, the iShares Semiconductor ETF finds itself in a deeper bear market, down 29% from its recent high.
Market analysts advise reevaluating investments as the narrative around AI shifts. JJ Kinahan of Cboe Global Markets warns of the significant upfront investments made in AI and suggests the boom’s veracity is being tested. On Friday, AI-linked technology stocks struggled, with Intel, Micron, and Nvidia all reporting substantial declines. Hyperscale companies like Amazon and Google were also affected, the latter suffering its worst trading day after reporting a dip in core advertising sales.
As traders express skepticism, some suggest diversifying away from the AI-centric tech sector. Mike Khouw, a strategist at YieldMax, shared his concerns about the trade, hinting at more volatility ahead. Options specialists also note a shift toward buying downside protection, traditionally less common in the tech sector.
Interestingly, while some investors shy away from big tech, there’s growing interest in the commercial potential of AI technologies. Innovations like Meta’s Muse are perceived as promising, with relatively less downside fear priced in compared to Amazon. This indicates that while the AI trade in its current form undergoes scrutiny, longer-term confidence persists.
Despite these fluctuations, AI’s strategic value is underscored by business leaders like Philipp Schindler of Alphabet, who points to AI usage growth. However, challenges persist due to lower monetization rates, which may not fully support the requisite capital investment in AI.
Overall, the momentum in AI investment must soon translate into tangible profits, driven by enhanced productivity across industries. The potential for a future “tipping point” looms, akin to historical infrastructure buildouts, as mentioned by industry experts like Paul Tudor Jones. While the technology sector recalibrates, investors migrate toward non-tech entities like Coca-Cola and Walmart, currently experiencing gains.
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