How the AI transition is jolting Big Tech stocks
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Illustration: Aïda Amer/Axios
There's a big shift happening in Big Tech as the AI transition enters a new era.
Why it matters: Investors are changing the way they price these superstar stocks, but judging by what happened in the market Tuesday, they are not totally sure how to do so.
Where it stands: Stock markets surged Tuesday on hopes that the war would end, a familiar pattern by now after more than four weeks of conflict. Investors perked up on two things:
- A report that Iran's president is open to ending the conflict.
- President Trump told the New York Post that the U.S. is not going to be in Iran "too much longer" and that he believes the Strait of Hormuz will "automatically open."
By the numbers: That's all the investors needed to hear, apparently. The S&P 500 posted its biggest one-day gain since last May. The beleaguered Nasdaq surged 3.6%.
- Meta closed up 6.7%, Alphabet, 5.1% and Amazon, 3.6%.
- The Mag 7 jumped 4.5%.
Reality check: It was still a lousy quarter.
- The S&P 500 closed down 4.6% for the three months that ended yesterday — its worst performance since 2023.
- The Mag 7 was down 13% for the quarter.
The big picture: Underneath the volatility driven by the Iran war, there's a wholesale disruption underway in how the tech business works.
- For nearly 20 years, companies like Google and Meta were "asset-light," software players, with relatively lean infrastructure.
- At minimal cost, they were able to give a product away for free to billions of consumers and sell access to those consumers to advertisers.
"Where prior waves of technology scaled primarily through code, the current phase scales through capital, requiring infrastructure, power, cooling and compute," BlackRock analysts wrote in a note this week.
Friction point: To fund this new era, companies are borrowing money — by issuing more bonds.
- And investors are starting to price in the change, says Mike Treacy, vice president of risk at Apex, a clearinghouse. "The market is starting to take note of all this capital expenditure."
Follow the money: This is where the story gets kind of wild — and correlated to what's happening with the Iran war, oil prices and inflation expectations.
- Now that these tech companies are financing their spending with borrowing, not simply all the cash they have lying around, their stock prices are more sensitive to shifts in interest rates, Treacy explains.
- So when rates rose last week, as investors started pricing in inflation risks because of the war, tech stocks took a hit. And when interest rates fell earlier this week, tech stocks went back up.
"The most important thing in the market right now," Treacy says, "is this interplay between equities, oil and rates."
The bottom line: Stocks had a rough quarter, tossed around by war and AI.
