Key Points
- Despite Nvidia’s stellar earnings report, fears of an AI bubble persist among investors.
- The market is divided between skeptics who see unsustainable valuations and optimists who see a healthy correction.
- The stock market’s wild swing on Thursday, with an initial rally followed by a sharp sell-off, highlighted this uncertainty.
- Investors are now focused on the return on investment (ROI) from the massive spending on AI, a question that remains largely unanswered.
Wall Street had hoped that Nvidia’s blowout earnings would calm investors’ nerves about a potential bubble in artificial intelligence stocks. It didn’t. So, where does the AI trade stand now? It really depends on who you ask.
On one side are the skeptics. They are worried about the sky-high market valuations as investors pour money into a small group of stocks tied to the AI boom. They see the hundreds of billions of dollars these companies are spending to stay in the race as unsustainable, especially as some start to take on debt.
On the other side are the optimists. They see the recent drop in AI-related stocks as a healthy correction on the path to more growth. To them, the tech giants at the center of the AI trade—Microsoft, Amazon, Meta, and Alphabet—will keep spending on their AI offerings, with no signs of slowing down.
The uncertainty was on full display on Thursday, right after Nvidia’s earnings report. The chipmaker’s stock initially jumped more than 5%, lifting other AI-related stocks with it. But then, it reversed course and closed down 3.2%. The S&P 500 and Nasdaq 100 indexes did the same, opening higher before wiping out their gains to finish deep in the red.
“We saw an initial relief rally on the confirmation that demand is strong, but investors are now asking the next questions, which are, what about the power needs, what about margins, what’s the ROI?” said Natalie Hwang, managing partner of Apeira Capital Advisors.
While Nvidia’s results were excellent, the real question that investors are starting to ask is about the return on investment (ROI). When will all this massive spending translate into faster growth and better profits for the companies offering AI software and services? This is now a serious issue for Wall Street.
The cracks are already starting to show. Meta’s shares are down 21% since its last earnings report amid investor concerns about its aggressive spending plans. Microsoft has fallen 13% for a similar reason. Companies with weaker finances have been hit even harder, with CoreWeave’s stock plunging 46% this month and Oracle’s sinking 24%.
All of this leaves investors divided. The one thing everyone seems to agree on is that the AI ride is going to get even bumpier from here on out.
