The global AI trade is starting to fracture as soaring capex, rising debt loads and doubts over who will profit from the technology force investors to draw sharper lines. Markets are now splitting across stocks, sectors and even regions.
When ChatGPT launched in November 2022, anything linked to the artificial intelligence theme surged – from chipmakers and software firms to raw-materials suppliers and even companies most exposed to AI disruption.
That lifted equity and debt markets to levels that have drawn bubble warnings from regulators and investors, even as the likes of Microsoft, Amazon, Alphabet and Meta mapped out hundreds of billions of dollars in spending.
This week’s market turmoil suggests the trade is hitting a turning point as investors weigh the promised AI payoff against its rapidly rising cost.
Here are four charts that show how the AI trade is mutating.
1) PICKS ‘N SHOVELS OUTPERFORM
This week’s rout in software stocks has widened the gap between AI “picks ‘n shovels” – hardware makers powering the AI data centre build-out – and firms further down the supply chain.
In the U.S., ServiceNow and Salesforce have dropped 12% and 9% respectively this week. In Europe, data and analytics firms RELX and London Stock Exchange Group are down 16.4% and 6.3%.
The reversal is stark. Software, data and analytics groups were initially seen as AI beneficiaries, with hopes generative AI would bolster products and profits.
Semiconductor and data-centre-exposed shares have also fallen this week, but far less, extending a gap already widening between enablers and potential casualties of AI.
“This divergence is not a vote against AI. It is a signal that investors are differentiating between who enables AI and who may be disrupted by it,” Charu Chanana, chief investment strategist at Saxo, wrote in a note.
Barclays equity strategists said on Wednesday the same pattern was showing up across Europe, calling dispersion in the region’s AI trade “extreme”.
2) MAGNIFICENT 7 NO LONGER MOVING AS ONE
The once-unified Magnificent 7 group of most valuable U.S. stocks is also diverging, as investors move from rewarding big capex announcements to scrutinising the return on that spending.
Portfolio managers at Goldman Sachs Asset Management flagged in January that diverging AI and cloud strategies were breaking apart the Magnificent 7 narrative.
That has come into sharp focus. Microsoft and Meta both reported higher capex, yet Microsoft shares fell 10.4% on January 29 while Meta rose 10%.
Google parent Alphabet posted a huge jump in capex on Thursday, sending its shares down as much as 8% before they closed flat. Amazon’s shares were down 8.5% on Friday after announcing a more than 50% increase in this year’s capex.
“There’s going to be huge divergence … as a group they could well be market underperformers this year,” Mark Hawtin, head of global equities at Liontrust, said of the seven stocks.
“You need 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 is down 5% in the last week, versus a 2% fall in the S&P 500.
3) SOUTH KOREA SURGES ON AI ‘MEMORY’ MANIA
While the winners and losers among AI adopters are not yet clear, investors are betting on chipmakers – especially those exposed to AI-driven demand for memory.
South Korea, home to some of the world’s biggest memory producers, has become the standout market. The main KOSPI index is up 20.8% year to date, versus a 0.5% drop in the S&P 500 and a 4% gain in Europe’s STOXX 600.
“From Q3 onwards – but it’s really only captured people’s attention in the last month – it (the AI capex trade) has now shifted really heavily to memory, which is a Korea trade,” said Gerry Fowler, head of European equity strategy and global derivatives strategy at UBS.
South Korean chipmakers Samsung Electronics and SK Hynix are up 32% and 29% respectively this year.
Morningstar Direct data shows flows into U.S.-listed Korean equity funds rose 20% in January, making them among the most popular picks last month.
(Reporting by Lucy Raitano)
