AI fears are rocking markets as investors worry about high costs for the massive AI buildout. The iShares Semiconductor exchange-traded fund fell for nine straight sessions to lose 15%. Evercore ISI’s Nicholas Amicucci said, “the outlined revenue profile of Anthropic underwhelmed, further dampening any AI momentum,” as tech stocks struggled.
“This isn’t the first time we’ve had a sizable market wobble on the back of AI fears, but as we move to a capex cycle funded out of debt rather than simply free cash flow, we have to increasingly respect the credit price action,” writes Deutsche Bank’s Jim Reid.
In other words: a massive amount of capital will be needed for the AI buildout, and higher rates and wider credit spreads will make it that much more expensive for companies to tap the credit markets.
The AI crowd is also looking to equity markets, with OpenAI and Anthropic both planning to go public. But there, too, we’re seeing problems. It was reported this past week that Anthropic grew revenue by 45% in the third quarter over the second quarter, which is obviously impressive. But that’s down from the triple-digit quarter-over-quarter growth seen in the second quarter, leading to concerns about Anthropic’s valuation.
Just as the market was trying to come to grips with AI financing concerns, “the outlined revenue profile of Anthropic underwhelmed, further dampening any AI momentum,” writes Evercore ISI’s Nicholas Amicucci.
Anthropic and OpenAI support a large share of the AI ecosystem, and they might well make the best AI models. But if other models are nearly as good, then companies and consumers won’t be willing to pay up for Claude and ChatGPT. And then who will pay for the data centers and the chips?
So the semiconductors have had a dreadful run, with the iShares Semiconductor exchange-traded fund falling for nine straight sessions to lose 15%. There’s no need to send its holders a condolence basket, though, given that the ETF remains 60% higher on the year.
In fact, one of the themes this week has been that the winning stocks have suffered, while the losers have enjoyed a rare moment in the sun. Hated names like Cava Group, Lululemon Athletica, and Nike all rallied powerfully on Thursday and Friday. The consumer staples sector—previously highlighted in this column as the best hedge against an AI slowdown—rose 5% on the week.
As a result, index performance varied wildly. The Nasdaq Composite fell 4.3% on the week, while the S&P 500 lost just 1.9%, and the Dow Jones Industrial Average was actually 0.5% higher.
One of the clearest ways to make sense of the action is to look at the iShares MSCI USA Momentum Factor ETF, which tracks the market’s best performers. It fell every day of the week, losing 8%, for its worst run since July. Back then, the carnage was precipitated by forced selling on the part of AI-focused Situational Awareness hedge fund—and unconfirmed rumors of another AI-related fund blowing up were getting passed around on Thursday.
The broader point is that the AI winners have become very popular hedge fund holdings, which means that sharp declines can be met with forced selling, begetting further declines. Since such funds generally hedge their exposure, they will pair longs in semiconductors with short trades on stocks like Nike and Cava.
Long/short story short: There are fundamental reasons to be concerned about the AI trade right now, but positioning is running the show.
“Fear is in the air,” writes Warren Pies of 3Fourteen Research. “Whether or not it is prudent to reduce risk, this backdrop requires more tactical positioning and an extra dose of paranoia.”
Or, as Baird tech strategist Ted Mortonson tells us: “You don’t catch a falling knife until it hits the ground and stops spinning.”
Mortonson sees tremendous potential in AI and in many of the AI enablers, particularly names like Microsoft and ServiceNow, which help other companies integrate and use AI, and are trading at reasonable valuations. “They already have their hooks into the enterprise, which means the game is theirs to lose,” he says.
But he emphasizes that when the selling gets heavy, the wise seek out higher ground.
“Until this market gets rooted back in the fundamentals,” Mortonson says, “I’m just buying Berkshire.”
It’s a sound strategy. But for those readers who have been waiting on the sidelines to buy an AI dip—well, what are you waiting for?