AI pixie dust is losing its stock market power
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Soaring sales, booming backlogs and gangbusters guidance from AI-related companies just doesn't cut the mustard in this market moment.
Why it matters: The lackluster response to still strong AI-related earnings points to growing investor doubts about the durability of the boom.
Catch up quick: A broad swath of AI-related shares took it on the chin this week, including:
- Hyperscaler Meta (down 9.4%).
- AI-construction plays like HVAC provider Comfort Systems (-19.3%) and engineering and construction giant Quanta (-13.5%).
- And AI power trades like turbine maker GE Vernova (-11.5%) and Bloom Energy (-12.7%).
Between the lines: The slump came despite some of those very same companies reporting the kind of top-line Q3 results, that likely would have received the market's version of a standing ovation last year.
Cases in point: Meta's third-quarter results Wednesday were great. It was a legit beat-and-raise. The stock plunged 7% the next day.
- Thursday results from Comfort Systems, which has seen booming sales related to cooling equipment needed for data centers, topped expectations too with order backlogs almost doubling last year's levels. The stock dove 9.3% Friday.
- Western Digital, a maker of hard disk drives that suddenly became indispensable components of data centers, also reported astounding figures Thursday. EPS rocketed up by 161% year-over-year. And yet... crickets. The shares slipped 3%.
Big picture: The pain isn't confined to those reporting results.
- A list of the S&P 500's worst performers for the week is replete with cherished AI-related trades from last year.
- They include engineering and construction firms Quanta, EMCOR and Vertiv to chip-making machinery companies KLA and Lam Research, to makers of the fiberoptic cables needed to link up vast arrays of servers such as Coherent.
Reality check: The AI trade has suffered through crises of confidence before.
- Remember the DeepSeek freak-out in early 2025?
Yes, but: The inability of AI shares to elicit any enthusiasm from investors is a big problem for the market.
- In back of the envelope terms, AI-related shares — using the tech sector plus Meta, Amazon and Alphabet as a proxy — represent more than 50% of market capitalization of the S&P 500.
- And AI related sales are a big deal for plenty of other non-tech stocks in the index.
The bottom line: If the AI trade stops working, its quite hard to see how the overall market keeps any kind of forward momentum. Buckle up.
