The dream of artificial intelligence (AI) revolutionizing industries and propelling stock prices to stratospheric heights appears to be facing a harsh reality check. On Wednesday, a brutal selloff ripped through the Nasdaq 100, raising fears that a much-hyped AI bubble could be deflating before it even fully inflates.
The rout, triggered by a lukewarm earnings report from Alphabet (GOOG), sent the tech-heavy index tumbling over 3%, its worst performance since October 2022. Leading the charge downwards were semiconductor giants like Nvidia (NVDA), Broadcom (AVGO), and Arm Holdings (ARM), all heavily invested in AI hardware.
Investors, who had poured trillions into AI infrastructure expecting swift returns, are starting to question the timeline. Alphabet’s bloated capital expenditures, despite lacking a clear ROI on AI initiatives, fueled the anxieties. “There’s a pretty insane amount of money being spent,” observes Alec Young, chief investment strategist at Mapsignals. “Maybe it’ll pay off in a few years, but investors are realizing the payoff might take longer than expected.”
This sentiment shift is reflected in the options market. Demand for bearish puts on Nvidia, a bellwether for AI stocks, has surged, while the cost of protection against a broader tech downturn is rising. This suggests growing anxiety amongst investors who had been piling into bullish calls on AI stocks during the rally.
Was it a Rotation or a Correction?
While the selloff undeniably reflects concerns about AI’s profitability, some see it as a temporary correction within a larger trend. “We might be seeing some AI fatigue,” says Neville Javeri of Allspring Global Investments, “but it’s likely a short-term reaction to earnings that weren’t quite as stellar as anticipated.”
This view aligns with the ongoing rotation out of tech giants and into small-cap stocks poised to benefit from potential Fed rate cuts. For a fourth consecutive day, small-cap stocks outperformed their larger counterparts, further suggesting a broader market shift, not necessarily an AI-specific collapse.
Bubble Talk: Are Valuations Justified?
However, the selloff exposes underlying concerns about inflated valuations. Tech stock valuations, particularly those of AI darlings like Nvidia trading at 36 times projected earnings, are historically high. Jim Covello, of Goldman Sachs, represents a growing chorus questioning the commercial viability of AI and the astronomical costs of building the necessary infrastructure.
Earnings Season: A Test for Tech Giants
The coming weeks will be crucial as the rest of the tech titans report earnings. Investors will be scrutinizing AI-related investments and their impact on the bottom line. Companies like Microsoft (MSFT), Meta Platforms (META), Apple (AAPL), and Amazon (AMZN) are all on deck, with Nvidia reporting last on August 28th.
Conclusion: A Reality Check, Not a Death Knell
While the recent selloff raises concerns about the near-term prospects of AI, it’s too early to declare the technology dead on arrival. The long-term potential of AI remains undeniable. However, investors are demanding a clear path to profitability before fully embracing the AI revolution. This correction serves as a reality check, reminding us that even transformative technologies require time to mature and deliver on their promises
