Wall Street faces an AI reality check from Meta
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Meta stock fell this week on reports of the company looking at downsizing its artificial intelligence division.
Why it matters: This is a warning to investors, notably those enthusiastic about the AI revolution: The spending spigot can shut off at a moment's notice.
Driving the news: Meta's AI division will undergo a reorganization, per the New York Times. The Information earlier reported a planned restructuring.
- Some AI executives are expected to leave Meta.
- The stock also had its worst two-day drop since the market volatility in April. The information technology sector fell 1.75% on Tuesday.
Between the lines: This is what Wall Street fears most: a pullback in AI spending from the companies propping up the entire stock market.
By the numbers: The top 10 companies in the S&P 500, which account for nearly 40% of the index based on market cap, are each other's customers.
- Meta, Microsoft, Alphabet and Amazon are expected to spend $400 billion on AI next year. That capital expenditure translates to sales for other tech giants, ranging from Nvidia to Broadcom.
- Because the biggest tech companies in the S&P 500 are each other's biggest customers, a pullback in spending by one could weigh on earnings across the group.
What they're saying: "Whenever you see these huge capex booms, there's so much demand for it, there's so much money to be made, almost inevitably, you overbuild," says Trevor Slaven, the global head of asset allocation at Barings, with more than $400 billion in assets under management.
- Big Tech firms contribute "essentially the same amount of GDP growth as the entire consumer base, which is just unprecedented," he tells Axios.
- He likes equities in the near term, but is looking for opportunities to trim risk for the fourth quarter while adding exposure to private portfolios.
Be smart: The Meta news comes at a time when stocks are already hovering near all-time highs and investors are anxiously anticipating news about any interest rate cuts that could come from the Federal Reserve.
The bottom line: A pullback in AI spending isn't yet fully priced into the market, and at these valuations, it's a risk investors aren't prepared to face.
