Like the audience at a three-ring circus, investors don’t quite know where to look.
On Tuesday night, software stocks got clobbered because artificial intelligence was going to demolish their business models. On Wednesday night, tech stocks got clobbered because AI isn’t demolishing things fast enough.
While the selling pressure on software and data stocks eased, a wave of selling hit AI stocks after investors decided they were very displeased with the December quarter results of chipmaker AMD.
This was a strange one. AMD smashed analyst expectations for both profits and revenue – revenue in its data centre business surged 39 per cent in the December quarter, and is forecast to surge 60 per cent in the March quarter. Chief executive Lisa Su used the very technical term “going gangbusters” to describe the demand AMD was seeing.
“What I would tell yo16 ARTIFICIAL INTELLIGENCE & CYBER CRIMEu from someone on the inside is that AI is accelerating at a pace that I would not have imagined,” Su told CNBC.
And how did AMD’s share price react? Down 16 per cent on Wednesday night, of course.
This dragged Nvidia down more than 3 per cent, tech darling Palantir down almost 13 per cent, data centre junior CoreWeave down more than 7 per cent, Oracle down 4.5 per cent and the Nasdaq Composite index down more than 2 per cent at its intraday low, before it bounced a little.
The problem, apparently, was that AMD’s guidance was a little softer than the market wanted to see. For investors, that clearly didn’t quite add up. If demand is going gangbusters and AI investment is climbing seemingly by the minute from Tulsa to Tasmania, shouldn’t those growth rates be even stronger than they are?
This is another perfect example of what veteran tech investor Alex Pollak, chief investment officer at Loftus Peak, described as the market’s “schizoid” approach to the AI revolution.
One day, investors are panicking that AI players such as OpenAI and Anthropic are going to allow businesses and consumers to replicate the products of the cloud computing and software giants that have been market darlings for a decade. The next day, investors are worried that this process isn’t going fast enough.
Both of these sentiments can be right, of course – the AI players could wipe out the software players, and the AI players could face a squeeze on the earnings, operations and balance sheets if the speed at which they are monetising the AI revolution doesn’t match the speed at which they are investing in AI infrastructure.
What investors are wrestling with is the time frame over which both of these things occur, and, most importantly, the price that they should ascribe to these stocks as the AI revolution rolls on.
Indeed, after Wall Street closed for Wednesday night, we got more examples of investor nervousness. Google’s parent Alphabet smashed analyst expectations by producing a 30 per increase in profits to $US34.5 billion in the December quarter, but then shocked Wall Street by doubling it plans for capex spending in calendar 2026 to as much as $US185 billion, far above analyst expectations for about $US120 billion. Google stock fell 2 per cent in overnight trade.
Meanwhile, shares in chip design giant ARM fell almost 9 per cent on softer than expected earnings guidance.
It’s the market’s healthy scepticism
Obviously, this has felt very messy in the past few days. But zoom out, and the direction of travel looks a bit clearer.
Deutsche Bank strategist Jim Reid has examined the drawdown of a set of major stocks connected to the AI revolution (that is, the amount the stocks have fallen from their recent peaks), and the numbers tell the story of two fears. First, of AI disruption, and second, that there is going to be a nasty gap between AI investment and returns.
On the software side, names such as Duolingo (down 78 per cent from its peak), ServiceNow (down 53 per cent), Salesforce (down 45 per cent) and Adobe (down 41 per cent) are among the biggest casualties.
But even the stocks which are thought to be the safest bets in the AI revolution – the so-called shovel and pick names – have had a tough time of it. Nvidia is down 13 per cent from its peak. Palantir is down 24 per cent. Microsoft is also down 24 per cent. Broadcom is down 22 per cent. Oracle is down 51 per cent.
In other words, this has not just been about two days of confusion. This is the market’s very healthy scepticism about AI playing out over a period of weeks and months.
For all that though, it’s important to note that the S&P 500, the global benchmark for risk in financial markets, remains within 3 per cent of its all-time highs.
Indeed, while tech was having another conniption on Wednesday night, something remarkable happened. Eighty-two members of the S&P 500 hit one-year highs before midday, including giants such as Walmart, ExxonMobil, Johnston & Johnston, Caterpillar and wind turbine maker GE Vernova.
Indeed, seven of the 11 S&P sectors were in the green, suggesting that even as investors have shifted away from tech, they have not been shifting away from stocks, and the rally is broadening out.
For index investors – and let’s face it, that includes everyone from retail punters to superannuation funds these days – this is good news. As US strategist Warren Pies notes, never before has an S&P sector that is such a large chunk of the index (software is more than 8 per cent of the S&P’s total market cap) sold off so hard (a more than 25 per cent fall) and the market has remained within 3 per cent of all-time highs.
The numbers don’t lie. But it’s also true that this tech sell-off feels nasty, and for a very good reason: we’ve got lots of stocks down between 30 per cent and 60 per cent, and the market’s concentration around tech has been intense. This feels like a moment because it is.