Big Tech’s AI promises become a ‘show me’ story for investors: Report
There were some bright spots in the week that signaled the AI trade isn’t completely dead | Representational Image
After a jam-packed week of earnings reports from megacap technology companies one thing is clear: as profits slow, investors aren’t impressed by artificial-intelligence promises anymore. They want to see results.
With six companies inside a group known as the Magnificent Seven already having reported, year-over-year earnings growth has slowed to nearly 30 per cent in the second quarter, down from 50 per cent in the prior period. Analysts expect that rate to decelerate further, to about 17 per cent for those companies in the third quarter.
Results from Microsoft Corp., Meta Platforms Inc., Amazon.com Inc. and Apple Inc. this week signaled that the biggest companies in the world are still heavily investing in artificial intelligence. However, shares of Microsoft and Amazon slid after their reports because of fears that those AI investments aren’t paying off for them — at least not yet — echoing the slip in Alphabet Inc.’s stock a week earlier.
Tesla Inc.’s July 24 report also disappointed investors, while Nvidia Corp. is due to release results later this month. The latest prints and commentary this week added to existing volatility.
Investors had already been shifting from large, trusted stocks into smaller, riskier parts of the market to lessen exposure to Big Tech. The earnings results, combined with the Federal Reserve signaling that a September rate cut may be on the table and a weaker-than-expected jobs report sent the Nasdaq 100 Index spiraling.
On Friday, the tech-heavy index closed down 11 per cent from its July peak, entering a correction. Investors fled AI stocks and bid up bonds, sending Treasury yields lower.
The bond market is “telling us we’re going to have to bring this sucker down real fast, and that’s kind of worrying everybody,” said Kim Forrest, chief investment officer at Bokeh Capital Partners. “Lower interest rates work for equities, except when it’s being done in a hurry because things are bad.”
Investors were already concerned about hype-versus-reality in the tech sector, which contributed to sharp reactions when major companies underperformed, said Burns McKinney, managing director and senior portfolio manager at NFJ Investment Group.
“Some of the earnings results that have come in over the last couple of weeks have reminded investors that there’s a lot of really high expectations baked into these valuations,” he added.
There were some bright spots in the week that signaled the AI trade isn’t completely dead.
Investors cheered Meta’s results, including comments from Chief Executive Officer Mark Zuckerberg that signaled investments in AI helped drive targeted ad sales. Advanced Micro Devices Inc. spurred a Wednesday rally in chip stocks after it gave a rosy revenue forecast.
“Essentially what companies are saying is that they have to do this and if they don’t, they could risk being irrelevant in the future,” Gene Munster, managing partner of Deepwater Asset Management, said of the increased capital expenditures on artificial intelligence.
The sharp market reaction doesn’t necessarily mean the AI trade is over, Sarhan said.
“Instead, it suggests a recalibration of expectations,” he said. “We’re seeing a shift from pure hype to a demand for tangible results.”
(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)
First Published: Aug 03 2024 | 7:28 PM IST