Profit pressure: A car drives past signage displayed outside of Broadcom’s headquarters in California. Carlson does not recommend clients sell AI-exposed stocks such as Nvidia, and says the outlook for many such stocks remains solid. — Bloomberg
NEW YORK: The red-hot trade backing artificial intelligence (AI)-related stocks has taken a bruising from back-to-back troubling updates from Oracle and Broadcom, reigniting concerns about frothy valuations and an AI bubble.
Still, investors say reasons for optimism about AI remain intact, and many are wary about calling a top.
Investors have piled into AI-related companies this year as the technology has taken off, with promises to make Corporate America more efficient.
But some investors feel AI-related shares are overvalued.
High-profile names such as Michael Burry have been bearish, comparing the recent AI boom to the 1990s dot-com era.
For now, however, short-selling has been limited to smaller companies, with few pressing bearish bets against the biggest AI names.
The latest concerns centred on Oracle and Broadcom.
Oracle’s shares slumped as much as 17% since last Wednesday’s close after the company, which has taken on debt to finance its ambitious AI spending, warned capital expenditures for financial year 2026 are now expected to be US$15bil higher than it estimated in September.
Oracle stock came under fresh pressure last Friday following a Bloomberg report that the company has pushed back the completion dates for some of the data centres it is developing for OpenAI to 2028 from 2027.
Broadcom shares fell more than 11% last Friday, a day after the chipmaker warned growing sales of lower-margin custom AI processors were squeezing profitability, sparking worries that the business may be less lucrative.
The hit to Oracle and Broadcom weighed on other tech shares during the day, as investors worried about AI spending and the lack of a clear timeline on returns from the investments.
The tech-heavy Nasdaq sank 1.4%, while the S&P 500 Index fell 0.9% last Friday afternoon, a day after finishing at a record high.
“I still think the AI trade is intact,” said Chuck Carlson, chief executive at Horizon Investment Services in Hammond, Indiana.
“I don’t think this is the beginning of a sustained significant decline.”
The turbulence last week for AI-linked stocks seemed similar to shorter-term selling in the wake of the DeepSeek news earlier this year and other AI “blips downward” in 2025, said Carlson.
He was not recommending that clients sell AI-exposed stocks such as Nvidia, and said the outlook for many such stocks remained solid.
“Is there going to be potentially more subdued performance in those stocks (heading into 2026)? Yeah, but I mean, they’ve been gangbusters and it’s hard to maintain that,” he added.
Oracle, last Thursday, declined to comment on its share price move or the AI trade.
Broadcom did not immediately respond to a request for comment last Friday.
Investors have been growing more picky in the AI space, some market participants said, with less willingness to indiscriminately reward spending on AI.
“You’ve seen this really positive correlation between really aggressive capital spending and stock prices.
“That has changed pretty significantly beneath the surface over the last couple of months,” said Mark Hackett, chief market strategist at Nationwide.
In late November, Meta shares slumped 11% after the Facebook and Instagram parent forecast “notably larger” capital expenses next year due to AI investments, including aggressively building data centres.
Capital spending, a crucial component of the AI trade, has propelled equities following the launch of AI assistant ChatGPT in November 2022.
“I think a leadership shift is absolutely warranted and it’s underway.
“But that doesn’t mean the AI story switches off like a light switch,” Hackett said.
Even investors who question the AI trade are wary of betting against it.
“I believe today the stock market is in a phase that could become a blow-off top of extreme magnitude on the upside,” Burry, the famed investor whose successful 2008 bets against the US housing market were dramatised in the movie The Big Short wrote in a post.
Burry recently stepped up criticism of tech heavyweights including Nvidia and Palantir Technologies, questioning the cloud infrastructure boom.
Furthermore, he has a short position on Palantir.
Two leading US fund managers, who requested anonymity, said worries about a bubble are exaggerated.
They said Big Tech “hyperscalers” were still struggling to meet unrelenting demand for more data centres.
“Across our basket of 61 AI-related stocks, we don’t yet see positioning that looks like investors aggressively betting on an AI bubble bursting,” said Peter Hillerberg, cofounder at data and analytics company Ortex Technologies.
Investors have shown a pick-up in appetite to short the smaller and mid-cap AI names, yet the largest AI beneficiaries remain only lightly shorted, Ortex data showed as of last Thursday.
“We have seen stock-specific spikes in short interest around earnings and headline risk in certain AI-linked names, including Oracle, and some of those trades will naturally look smarter after sharp post-results moves,” Hillerberg said.
“But taken together, the data look more like targeted scepticism in individual AI stories than a broad, coordinated attempt to call the top of an AI bubble.” — Reuters
