Wall Street's AI honeymoon phase is over
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Investors are bored with an AI narrative that has helped them get three years of back-to-back, double-digit market gains.
Why it matters: This bull market has been primarily driven by a deep belief in the AI narrative. It's unclear what will drive stocks without that faith.
What they're saying: "If you think about the history of technology equities back to various bubbles, late in the cycle, investors say the names have become tired," Paul Kedrosky, a venture capitalist, tells Axios.
- "That's investor parlance for, like, 'I'm bored.'"
- The XLK ETF tracking Big Tech stocks is down over 4% so far this year.
Between the lines: AI companies keep spending money on their buildouts with the promise that it will lead to lucrative returns.
- That shiny future was enough to sustain stocks and investor sentiment for a few years, but Wall Street needs a new story to keep it excited.
- That's especially true as the biggest tech companies are spending more and more: JPMorgan expects the data center buildout amid the AI boom to cost more than $5 trillion.
- That's a sixth of the entire GDP of the U.S.
Zoom in: Even within AI, investors are still seeking out clearer use cases.
- Bank of America sent clients a note on how "AI has left the chat," but physical AI is in.
- Think robots, autonomous vehicles and drones.
- This reflects the broader sentiment: Investors want stuff they can see, not promises that are expensive.
Yes, but: If software stocks are tanking because AI will replace software, shouldn't AI stocks be up?
- Investors can be fickle.
- "Not every sell-off is a signal - some are just stress tests," Mark Malek, chief investment officer at Siebert Financial, wrote in a note to clients.
- And the tech sell-off has been coupled with a so-called rotation into less expensive corners of the market, which is exactly what those worried about an AI bubble wanted to see happen.
What we're watching: Investors are "desperate for new names," Kedrosky says, and the good news is they're almost certain to get their wish this year, with major AI competitors expected to go public as they seek more capital to fund their ambitions.
- That could suck even more air out of the Magnificent 7 as investors are lured by "shiny new toys" that go public, he notes.
The bottom line: Wall Street needs a new catalyst to bring the spark back to its AI love affair.
