Tech-Stock Rout Accelerates the Retreat From the AI Trade

Tech stocks were headed for their worst decline since June on Thursday, with the semiconductor index briefly falling by double digits in the latest autumn reckoning for the AI sector.

The SOX fell as much as 11%, its worst performance since March 2020, and the Nasdaq composite dropped as much as 5%, a decline that would confirm a correction denoting a 10% pullback from its high last month.

Advanced Micro, Sandisk, Micron, Dell and Marvell Technology were among the more than a dozen large technology stocks down by double digits percentagewise.

It's the latest in a string of selloffs for the AI sector in what has been a bruising month since the Nasdaq's record close on October 6. Selling in stock and bond markets has reduced access to financing for many participants in the data-center buildout, while Tuesday's US elections brought the passage of dozens of nationwide ballot initiatives that stand to limit building in coming months and years.

What analysts are saying

"AI stocks are already in a private bear market that virtually nobody is talking about. If you look at the semiconductor index, it's down about 31% from its 52-week high. The point is that many AI-related stocks are already deep into bear market territory, and very few people are discussing it," said Adam Sarhan, chief executive of 50 Park Investments in New York.

"We're seeing large companies such as Apple cut back on AI spending because they are not seeing sufficient return on investment. The hype around AI was enormous, but now the market is asking whether customers will continue paying for these products and services," Sarhan said.

"In short, we're seeing the unwinding of the AI trade, while big technology stocks are moving deeper into correction territory," he added.

Will Compernolle, macro strategist at FHN Financial in Chicago, said there was a shift away from chipmaker stocks that was causing a bid for Treasuries: "Everything is tied to AI right now. The biggest market moves in October were, relatively speaking, pretty small tweaks in AI sentiment. But that is the catalyst. That is what determines demand for credit, economic growth, so many different things and I think after the midterms, a big question is how the outcome affects the trajectory of AI investment and we've already seen that rotation out of chip stocks and into hyperscalers."

Mark Hackett, chief market strategist for Nationwide, blamed relatively weak earnings from Qualcomm and ARM Holdings, and said the election was likely putting a governor on the speed of the AI build out, particularly for semiconductors and neoclouds. "They're dragging pretty much everything else down. But the main driver here is very aggressive institutional selling and de-leveraging by hedge funds and more active institutional managers. Today, this is an emotional sell-off," Hackett said.

"What we see in technology today is basically the unwinding of the AI trade if you look at the broader picture," said Ipek Ozkardeskaya, senior analyst at Swissquote Bank in Geneva. "We were already in a market mood that was not very appetising for technology due to the huge spending, higher borrowing costs and the fact that free cash flow levels at these hyperscalers are falling right now. They are issuing more equity and more bonds in order to finance additional AI spending, and both more equity and more bonds are negative for valuations."

Peter Andersen, founder of Andersen Capital Management in Boston, took a different view: "I think the sell-off first is unwarranted. And secondly, it's just the investors reorganizing their thoughts around the election results and how much policies will change to artificial intelligence and the associated technologies with that, such as the data center build outs."

Sources

• Reuters — VIEW: Tech-stock rout accelerates retreat from the AI trade