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The landscape of global AI investment is undergoing a significant transformation, marked by rising costs and increasing scepticism about profitability. As the market reacts to these pressures, a clear divide is emerging among stocks, sectors, and regions, suggesting that the fervour surrounding artificial intelligence may be waning.
A Shift in Market Sentiment
Since the launch of ChatGPT in November 2022, the enthusiasm for all things AI sent stocks associated with the technology soaring. Companies across various sectors, including chip manufacturers, software developers, and supply chain players, experienced substantial gains. Amidst this excitement, major tech firms like Microsoft, Amazon, Alphabet, and Meta announced plans for colossal investments in AI, fuelling speculation of a burgeoning bubble. However, recent market fluctuations signal a critical juncture, as investors begin to balance the anticipated rewards of AI against escalating costs.
This week’s turmoil has particularly impacted software stocks, creating a pronounced gap between AI “picks and shovels”—the foundational hardware companies driving AI data centre development—and those situated further down the supply chain. In the U.S., ServiceNow and Salesforce have seen their share prices plummet by 12 per cent and 9 per cent, respectively. European firms like RELX and the London Stock Exchange Group have similarly faced declines of 16.4 per cent and 6.3 per cent.
Divergence Among AI Beneficiaries
The contrast is striking. Initially viewed as key beneficiaries of AI advancements, software, data, and analytics companies are now facing scrutiny. While semiconductor and data centre-related stocks have also experienced dips, the declines are less severe, highlighting a growing distinction between those who enable AI and those who risk being disrupted by its rise. “This divergence is not a vote against AI; it indicates that investors are differentiating between enablers and potential casualties,” noted Charu Chanana, chief investment strategist at Saxo.
Barclays equity strategists echoed this sentiment, describing the dispersion in Europe’s AI market as “extreme,” further emphasising a shift in investor focus.
The Magnificent Seven No Longer United
The once-cohesive group of leading U.S. stocks, dubbed the Magnificent Seven, is also fragmenting. Investors are now prioritising returns over mere capital expenditure (capex) announcements. Portfolio managers at Goldman Sachs Asset Management had previously identified diverging AI and cloud strategies that were beginning to disrupt the unified narrative surrounding these stocks.
Microsoft and Meta have both reported increased capex, yet their stock performances diverged sharply; Microsoft’s shares fell by 10.4 per cent, while Meta’s rose by 10 per cent. Alphabet’s substantial capex announcement resulted in an initial 8 per cent drop in its shares before closing flat. Amazon, too, witnessed an 8.5 per cent decline after revealing plans for a more than 50 per cent increase in its capex.
“There’s going to be huge divergence… as a group they could well be market underperformers this year,” warned Mark Hawtin, head of global equities at Liontrust. “Investors want to see a clear cause and effect. If they’re spending the money, are they getting a return for it? The market is no longer tolerating spending for spending’s sake.” The Roundhill Magnificent Seven exchange-traded fund has fallen by 5 per cent in the past week, compared to a 2 per cent drop in the S&P 500.
South Korea: The Unexpected Winner
While the broader picture remains uncertain, one market that has surged is South Korea, fuelled by a burgeoning demand for AI-related memory chips. The KOSPI index has soared by 20.8 per cent year to date, standing in stark contrast to a 0.5 per cent decline in the S&P 500 and a modest 4 per cent rise in Europe’s STOXX 600.
“From Q3 onwards—though it has only recently captured attention—the AI capex trade has shifted significantly towards memory, which is very much a Korea trade,” explained Gerry Fowler, head of European equity strategy at UBS. South Korean giants Samsung Electronics and SK Hynix have seen their stock prices soar by 32 per cent and 29 per cent, respectively, this year. Furthermore, data from Morningstar Direct indicate that inflows into U.S.-listed Korean equity funds rose by 20 per cent in January, making them a significant draw for investors.
Why it Matters
The evolving dynamics of the global AI market underscore the need for investors to adopt a more discerning approach. As the enthusiasm surrounding AI investment begins to cool, the divergence between companies that enable AI and those that may be rendered obsolete is becoming clearer. This shift not only affects individual companies but could also reshape the broader investment landscape, as stakeholders recalibrate their strategies in light of rising costs and diminishing expectations for immediate returns. Such changes may have profound implications for the future trajectory of the technology sector.
