The market for artificial intelligence-related stocks is entering a new phase. Wall Street investors are no longer rewarding every company that merely announces it is pouring money into AI. Now they want to see positive numbers. And the earnings season beginning this week is expected to show whether the race so far has a genuinely solid foundation beneath its increasingly nervous surface.
Until recently, a simple rule applied. Companies that spent money on artificial intelligence saw their shares rise. We went through a phase when everyone investing in AI was rewarded, but the market is now becoming more selective. This shift is also evident in the indexes. The S&P 500 gained less than one percent last week. The Nasdaq swung back and forth, with chipmakers at the center of the action. Analysts describe the moves as quite frantic and expect companies' results for the next quarter to show where the entire industry is heading.
Analysts are looking for the next catalyst
The question almost everyone on Wall Street is now asking is: what will be the next catalyst? Growth in recent years was driven mainly by sentiment and enthusiasm. For the high share prices of technology companies to continue making sense, analysts need proof that investments in artificial intelligence are translating into actual revenue and profits.
Analysts are watching specific metrics. Margins, revenue growth, and free cash flow growth. According to them, these will indicate whether the entire AI cycle is sustainable or built on weak foundations.
Hopes are pinned on major data center operators, known as hyperscalers. Wall Street expects them to reaffirm their commitment to investing in AI during this earnings season. That could help chipmakers and manufacturers of related equipment. One company's spending is another company's revenue and profit.
Investors are becoming more selective
Market behavior has changed noticeably. Companies in the so-called "Magnificent Seven" and chipmakers have alternately fallen and rebounded since the end of June as investors scrutinize every aspect of AI trades. A fund tracking the Magnificent Seven has jumped eight percent over that period. Meanwhile, the rest of the S&P 500, excluding those seven companies, has remained virtually flat. And the Philadelphia Semiconductor Index has fallen twelve percent.
A sign that the enthusiasm has not disappeared came on Friday. Memory chipmaker SK Hynix debuted on the Nasdaq, and its shares immediately jumped fourteen percent. Investors thus gained a way to bet on memory chips beyond the U.S. giant Micron. Its shares have risen more than 250 percent this year, although they have experienced considerable volatility in recent weeks.
If Micron announces again that it cannot keep up with demand, who stands to benefit? According to analysts, SK Hynix. They see more upside in memory chips. Not everyone is cautious. Analysts at Yardeni Research described the recent weakness in semiconductor stocks as a buying opportunity. According to them, the stocks' sharp rise over the past three years has been firmly supported by the companies' earnings.
Those who cannot demonstrate returns will fall
The reality is harsher than it seems. A more selective market means that companies unable to clearly demonstrate what the money poured into AI has delivered are coming under pressure. This is true even if they belong to the technology sector, which as a whole is soaring.
UBS analysts describe how the focus of attention is shifting. Investors are gradually becoming less interested solely in growth over the next few months and are beginning to consider whether companies can sustain high spending beyond 2027. As a result, diversification and careful selection of individual stocks will become increasingly important.
UBS advises sticking with the so-called picks and shovels of the entire AI buildout. That means semiconductor manufacturing equipment, chipmakers, and computing infrastructure built around processors and memory. It also sees value in more defensive areas, such as payment networks and funds that own data centers. Experts add that it is also worthwhile to monitor other long-term trends, such as energy and commodities or longevity, and potentially replace some direct stock bets with strategies that protect invested capital.
Source: finance.yahoo.com
