Amid a sharp rout in tech stocks, investors told CNBC on Thursday that something could be fundamentally broken in the AI business following Democrats’ big success in Tuesday’s midterm elections and the threat that they will try to slow data center construction.
Democrats are more aggressively opposed to data centers than Republicans, and Wall Street is quickly recalculating what the restrictions they implement could mean for the future growth of related companies.
“Right now, investors are questioning the $1.2 trillion in investments we are planning for next year,” Peter Boockvar, chief investment officer at One Point BFG Wealth Partners, told CNBC. “Well, maybe that won’t happen.”
Boockvar believes this could be the beginning of the end of the AI business as we know it.
Whether it’s completely over or not, investors need to reevaluate how they plan to play the AI market going forward, analysts said.
THE Nasdaq Composite fell 5% on Thursday and fell into correction territory, down more than 11% from its record set last month. THE iShares Semiconductor ETF fell 11% on Thursday, its biggest drop since during the Covid outbreak in March 2020. Global X Artificial Intelligence & Technology ETF (AIQ) is down 6% on the day and 15% over the past month.
“There has been a huge shift in the outlook for AI infrastructure development,” Eric Johnston, head of equities at Cantor Fitzgerald, told CNBC. “The whole economy, as well as the growth in consumption and profits, are all linked to this growth.”
Thursday’s selloff carried over to non-AI stocks, with the Dow Jones Industrial average falling more than 1,600 points.
Josh Brown highlighted the 10-year Treasury yield’s 4.8% yield, saying a compelling risk-free rate makes investors reconsider taking risk in these volatile AI stocks.
“You don’t need to be 80% in U.S. stocks and have 60% of that exposure in technology,” Brown said.
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Many investors believe that the AI business is not completely over and that they simply need to be more selective.
“Developing AI has become more difficult,” said Rob Sechan, founder and managing partner of Newedge Capital Group:
“No one 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. This level of growth suggests limited capacity, not limited demand, he said.
“When new capabilities become harder to build, existing capabilities become more valuable,” Sechan said.
Richard Clode, portfolio manager at Janus Henderson, noted some positives in tech on Thursday despite highly correlated downward moves in major tech indexes.
“Motorola Solutions had good results,” he said. “We’re seeing a little turnover in some of the Internet names…Sony reported good results, and again, they were up sharply overnight.”
“So there are some brief moments of respite, but obviously quite painful across the board today,” he said.
Some experts believe the selling has been overdone and investors may start chipping away.
This “blind selling” constitutes a “buying opportunity,” said Raymond James chief investment officer Larry Adam. If investors “take a longer-term view, which we do, I think valuations at current 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 strong supports around the S&P 500’s 200-day moving average and was on the lookout for a market rebound after Thursday’s rout.
“Typically, the average return is over about 180 basis points the next day,” she said. “The question we have to ask: Is this a pullback in an uptrend, as I believe? Or is this the end of everything (and) the wheels come off and everyone just needs to buy Treasuries? I don’t think we’re there yet.”
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