Amid a powerful rout in tech stocks, investors told CNBC on Thursday that something may be fundamentally breaking in the AI trade following the big success of Democrats in Tuesday’s midterm elections and the threat they try to slow the data center buildout.
Democrats are more aggressively anti-data center than Republicans, and Wall Street is quickly redoing its math what any restrictions they implement could mean for the related companies’ future growth.
“Right now, investors are questioning that $1.2 trillion of capex that we forecast for next year,” Peter Boockvar, chief investment officer at One Point BFG Wealth Partners, told CNBC. “Well, maybe that’s not going to happen.”
Boockvar believes this could be the start of the end of the AI trade as we know it.
Whether it’s completely over or not, investors need to be reassessing how they’re planning to play the AI trade going forward, the analysts said.
The Nasdaq Composite dropped 5% on Thursday and fell into correction territory, off by more than 11% from its record high set last month. The iShares Semiconductor ETF dropped 11% on Thursday, its biggest decline since during the Covid breakout in March 2020. The Global X Artificial Intelligence & Technology ETF (AIQ) is down 6% on the day and down 15% over the past month.
“There has been a huge change in the outlook for AI infrastructure buildout,” Eric Johnston, head of equities at Cantor Fitzgerald, told CNBC. “The entire economy and the consumer and earnings growth are all levered to that buildout.”
The selling Thursday spilled over to non-AI stocks with the Dow Jones Industrial average down more than 1,600 points.
Josh Brown pointed to the 4.8% yield for the 10-year Treasury yield, saying a compelling risk-free rate is causing investors to reconsider taking the risk in these volatile AI stocks.
“You don’t need to be at 80% U.S. stocks and have 60% of that exposure be tech,” Brown said.
Finding opportunity
Many investors believe the AI trade isn’t over completely, investors just need to get more selective.
“The AI buildout just got harder,” said Rob Sechan, Newedge Capital Group Founder & Managing Partner:
“Nobody voted to make compute less scarce,” Sechan said, citing Microsoft’s Azure cloud business growing 48% year over year in its most recent third quarter. That level of growth suggests its capacity constrained, not demand constrained, he said.
“When new capacity gets harder to build, existing capacity becomes more valuable,” Sechan said.
Richard Clode, portfolio manager at Janus Henderson, noted a few bright spots in tech on Thursday despite the highly correlated downward movements in the big tech indices.
“Motorola Solutions had some good results,” he said. “We’re seeing a little bit of rotation into some of the … internet names…Sony reported some good results, and again they were up strongly overnight.”
“So there are some brief pockets of respite from this, but obviously pretty painful across the board today,” he said.
Some experts believe the selling was overdone and investors could start nibbling.
This “indiscriminate selling” is a “buying opportunity,” said Larry Adam, Raymond James chief investment officer. If investors “take a longer term perspective, which is what we do, I think the valuations at today’s levels will tend to prove to be a good buying opportunity,” he said, urging investors to look at the fundamentals.
Victoria Greene, chief investment officer of G Squared Private Wealth, said she saw some strong supports around the S&P 500’s 200-day moving average and was on the lookout for a market bounce following Thursday’s rout.
“Typically, the average return is plus about 180 basis points the next day,” she said. “The question we have to ask ourselves: Is this a pullback in an uptrend, which is what I believe? Or is this the end-all, be-all [and] the wheels are coming off and everybody just needs to buy T-bills? I don’t think we’re there yet.”
