The AI Thesis Hits the Wall
Selling was so intense Wednesday that even small-cap stocks eventually succumbed to the pressure.
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The S&P 500 and Nasdaq 100 QQQ suffered their worst losses since December 2022 on Wednesday. The trigger for the selloff were earnings reports from Alphabet GOOGL and Tesla TSLA. While the reports were softer than expected, the problem was that expectations were very high.
There appeared to be a reevaluation of the entire Artificial Intelligence theme, which has been touted as a generational change. The problem is that very few companies, outside of semiconductors, are making any money on it. Google still has to make massive capital expenditures before it reaps any substantial benefits, and Tesla has exciting possibilities, but in the near term, its margins are soft, and results on new projects are delayed.
One of the best examples of how the AI story has gotten ahead of itself is Apple AAPL. Apple has recently received a slew of positive analyst comments and raised prices targets due to its AI plans. However, two months ago its EPS estimate for fiscal year 2025 was $7.23. Today, it is $7.32, which would be only 10% growth year-over-year. The stock is expensive, and AI hasn't done much to add to the bottom line so far.
The market doesn't care about the reality of AI because it focuses on the story and the price action. It is not unlike the internet bubble, where a variety of valuation metrics were used to justify high valuations.
Mike Wilson of Morgan Stanley has been wrongfully bearish for a while, but he commented "AI is sucking all of the oxygen out of the room. I see AI everywhere, except in the numbers. ... It hasn't really driven revenues and earnings anywhere."
The big question now is how deep the AI correction goes. No one knows, but huge mega-cap stocks will always be favored by institutional investors to some degree, which will help them find support.
The selling was so intense Wednesday that even the small-caps eventually succumbed to the pressure after holding up quite well in the morning. Most of the market does not look nearly as bad as the Magnificent Seven right now, but the question is whether the buyers will be scared away by the worst day in a very long time.
While we still have plenty of earnings reports to shake things up, the big news is that the AI thesis has undergone a major change.
Have a good evening. I'll see you Thursday.
At the time of publictaion, Rev Shark had no positions in any securities mentioned.
