AI stocks tumble as inflation report fuels Fed rate hike speculation
High-flying technology stocks are experiencing a downturn this week, as investors become increasingly doubtful about the potential of the AI boom to meet expectations. Stocks experienced a decline on Wednesday, primarily driven by downturns in the technology sector, following an inflation report that exceeded expectations and strengthened speculation regarding additional interest rate hikes by the Federal Reserve. The S&P 500 experienced a decline of 1.11%, while the Nasdaq Composite saw a decrease of 1.88%, marking their most significant downturn since July. Shares of companies engaged in the construction of AI data centers – the essential tools of the AI boom – experienced a decline, affecting semiconductor chipmakers and cloud service providers alike. Marvell, a chipmaker, fell 8.7%, Oracle sank 8.8% and Dell dropped 11.3%. A benchmark index tracking semiconductor stocks declined by 4.3%, resulting in an approximate 12% decrease over the past week. Nvidia fell 3.2%, leaving it down roughly 7.5% since hitting a record high earlier this month.
Investors are processing a variety of apprehensions that are influencing sentiment regarding AI. Increased bond yields coupled with persistent inflation have resulted in heightened borrowing costs, thereby escalating the expenses associated with data center construction. That raises concerns for the more precarious, debt-laden segments of the AI ecosystem. Meanwhile, chip stocks have experienced volatility this week following the announcement from Chinese semiconductor company CXMT regarding advancements in advanced memory chips. That is fuelling apprehension regarding competition with manufacturers from the US and South Korea, whose projections are deemed “priced to perfection,” as per analysts. Semiconductor stocks have surged on the anticipation that firms will secure substantial profits due to the relentless demand for chips driven by the AI boom. However, a deceleration stemming from elevated interest rates, or heightened competition from China, could undermine projections for the future revenues and growth of chipmakers. The fate of the “picks and shovels” of the AI boom is significant, as technology and AI stocks have driven the market to unprecedented heights this year.
As various sectors of the market grapple with the challenges posed by elevated bond yields, the performance of these stocks becomes increasingly critical. “There’s just so much good news priced into the chip sector right now that you’re going to find it’s susceptible to meandering without some fresh catalysts,” Steve Sosnick told. Following robust rallies earlier this year, Wall Street continues to elevate its expectations for chipmakers’ earnings, creating potential for either disappointment or profit-taking. “Trees don’t grow to the sky,” Sosnick said. “You can’t just go up forever and ever and ever, assuming that nothing is going to go wrong.” Investors are closely monitoring the more speculative sectors of AI. CoreWeave, a so-called neocloud that is backed by Nvidia and leases compute power for the AI boom, plunged 15.5% on Wednesday after commentators raised concerns about a surge in the company’s bond yields.
The company carries tens of billions of dollars in debt on its balance sheet, as it seeks to borrow funds to facilitate business expansion and increase its market share. As interest rates increase, the cost of servicing that debt is becoming more burdensome. The market is increasingly acknowledging concerns regarding how companies burdened with substantial debt will manage repayment, particularly in light of delays in data center projects and the uncertainty surrounding the timelines for Anthropic’s and OpenAI’s initial public offerings, as noted by Sosnick. “There’s just so much money being thrown at this, and a lot of it has to be borrowed, and borrowed at increasingly high interest rates,” Sosnick said. “It’s an interesting conundrum.”
