Traders in the technology sector often exhibit a notable degree of impatience. However, recently, they have become quite frustrated with the substantial costs incurred to enter the AI sector, particularly in light of the profit increase they anticipated but have not realised. The Nasdaq, a barometer for the tech industry, was poised to decline by an additional 1.2% on Friday, reflecting the repercussions of a significant sell-off in South Korea, where the Kospi index experienced a drop of 5.8%. The Nasdaq has concluded each trading session this week with losses, experiencing a decline exceeding 6% from its peak reached on June 2. Investors should exercise caution: valuations of AI stocks have soared over the past few years, primarily driven by the technology’s potential rather than the profit growth that typically underpins stock price increases for most companies. AI demand is not experiencing a downturn; rather, it is thriving. However, the rapid expansion of the industry has compelled firms to invest and incur debts amounting to tens of billions of dollars to construct and advance the technology – without yielding immediate outcomes to demonstrate for their efforts. It is not entirely the responsibility of Big Tech.
AI has emerged as a remarkably costly pursuit. Rising demand for technology has driven a significant expansion in data centers, necessitating a substantial supply of high-performance chips that semiconductor manufacturers are unable to produce at a sufficient pace. That has driven chip prices to unprecedented levels, resulting in a K-shaped trajectory within the AI sector, igniting a surge in chipmakers’ stock valuations while simultaneously causing the tech firms behind the AI models to decline. Microsoft and Meta find themselves in a bear market, having experienced a decline of one-fifth from their peak valuations. The remaining members of the so-called Mag 7 tech giants – Amazon, Apple, Google, Nvidia, and Tesla – find themselves in correction territory, having declined by at least 10% from their recent peaks. To illustrate the Tale of Two AI Cities: Apple on Thursday announced a price increase for MacBooks and iPads due to a memory shortage, resulting in a decline of over 6% in its stock value.
Micron, the memory and storage chipmaker, experienced a notable increase of nearly 16% on Thursday following the announcement of impressive earnings the previous evening, attributed to the surge in demand for its semiconductors. Those market dynamics are causing the industry to reconsider its strategies. OpenAI is contemplating postponing its IPO due to the recent fluctuations in the market, which may hinder the company’s ability to achieve its targeted $1 trillion valuation, as reported. The Kospi, with fifty percent of its value derived from merely two technology giants (SK Hynix and Samsung), activated another circuit breaker on Friday, resulting in a 20-minute pause in trading. The Kospi, which has risen around 90% this year, has exhibited considerable volatility for an extended period. However, this week has exhibited notable volatility – declining by 10% on Tuesday, rebounding by 5% and 3% on Wednesday and Thursday, respectively, before experiencing another drop on Friday. The technology sector has been a significant driver of the stock market rally in recent years.
Despite its slump, the semiconductor industry has more than compensated, now constituting 19% of the S&P 500’s value. However, increasing bond yields and the likelihood of the Federal Reserve raising interest rates in the near future may adversely affect the technology sector, which is especially vulnerable to the pressures of elevated borrowing costs. Should the current unease in the technology sector escalate into a broader sell-off, it will be incumbent upon the remainder of the stock market to shoulder the burden of performance. The positive development: Non-tech sectors have experienced an increase this week. Despite its dependence on technology, the S&P 500 stands just slightly above 3% from reaching its historical peak. Meanwhile, tech stock traders are navigating a precarious landscape, keen to emerge from June unscathed.