NEW YORK: For months, investors have been worrying about a long list of risks to the gravy train of artificial intelligence (AI) spending.
This week, they hit the panic button.
Fears of the worst-case scenario for the AI trade kicked in after the US mid-term elections yesterday, in which Democrats secured majorities in the Senate and House of Representatives and won control of state houses and governor’s mansions across the country.
Many of the winning candidates ran on anti-AI platforms, raising the possibility that the development of data centres (DC) could grind to a halt in many places.
That realisation sent traders racing for the exits starting last Thursday, dumping shares of everything tied to the hundreds of billions of dollars in projected AI spending. The Philadelphia Stock Exchange Semiconductor Index plunged 12% while the tech-heavy Nasdaq 100 Index fell 6.4%, the biggest one-day drops for both since the Covid pandemic hit in March 2020.
And AI poster child Nvidia Corp led the market lower, tumbling more than 9% and losing more than US$440bil in market value.
The sector rebounded last Friday and regained some of Thursday’s losses, with the chipmaker index jumping 5% while the Nasdaq 100 rising 1.3%. Nvidia popped 5.7%.
“People are questioning the growth assumptions for DC suppliers and pulling back pretty broadly,” said Peter Tuz, president of Chase Investment Counsel, whose fund owns shares in chipmakers Nvidia and Advanced Micro Devices Inc as well as major AI spenders like Alphabet Inc and Amazon.com Inc.
“It is easy to draw a line from the election results to increased uncertainty toward the regulatory environment, and from there to the growth outlook for these companies.”
Anxieties about AI spending had been mounting for much of the year amid rising interest rates, higher levels of debt being raised to fund the build-out and an increasingly vocal backlash against DC development and expansion.
That spending has been key to the rise in the S&P 500 Index and has insulated the benchmark from macroeconomic problems, including high oil prices, elevated inflation and risks from the war in Iran.
It remains to be seen how efforts to rein in DC development and regulate AI will play out, of course, considering how slowly the gears of government often move.
But the sell-off shows the level of fear that the heart of the bull market is in trouble.“It feels like the economy is firing on one cylinder, and that cylinder is not only not pumping as fast as it used to, but it may even slow further due to the election,” said Barry Knapp, managing partner at Ironsides Macroeconomics.
“I’m not a buyer of anything right here.”
Nearly one-third of computing power projected to come online in the United States in 2028 is now at risk, according to estimates by strategists at UBS Group AG.
A majority of that is from DCs planned in Texas, where Gina Hinojosa, who has vowed to halt new DC approvals, defeated Republican Greg Abbott to become the first Democrat to win a governor’s race in the state since 1990.
Those concerns are prompting a rethink of the AI trade’s valuations, which were already under pressure.
Take Nvidia, which has been the biggest beneficiary of AI investment. It’s trading at 13 times profits estimated over the next 12 months, down from more than 32 times a year ago.
Broadcom Inc, the second-most valuable US chipmaker, is priced at 15 times estimated earnings, down from a peak of 42 times in December. — Bloomberg
