They are slowing down profits from technology companies The big cap and investors are no longer impressed by the promises of AI, because they want to see the results.
Annual revenue growth slowed to nearly 30% in the second quarter of 2024, from 50% in the previous period, based on reports from 6 companies in a group known as the “Magnificent Seven.” Analysts expect the pace to slow further, to around 17% for technology companies in Q3 2024.
The results from Microsoft, Meta, Amazon and Apple this week show that the world’s largest companies continue to invest heavily in artificial intelligence, according to a Bloomberg report today (4/8/2024).
However, shares of Microsoft and Amazon fell sharply after their reports on fears that investment in artificial intelligence is not paying off – at least not yet – contributed to a drop in Alphabet stock last week .
“Investors are looking for concrete evidence of AI’s impact on revenue and productivity,” said Adam Sarhan, founder and CEO of 50 Park Investments. “This is the cause of doubt and haste.”
Tesla’s July 24 report also disappointed investors, while Nvidia is expected to report results later this month.
Investors have moved from large, reliable stocks to smaller, riskier parts of the market to reduce their exposure to technology. The earnings results, combined with the Federal Reserve announcing the possibility of a rate cut in September and a weaker-than-expected jobs report, sent the Nasdaq 100 higher.
On Friday (2.8.2024), the technology-heavy index closed down 11% from its July peak. Investors fled AI stocks and bid up bonds, sending government bond yields lower.
Kim Forrest, chief investment officer at Bokeh Capital Partners, said: “Lower interest rates work in favor of stocks, unless they are done in a hurry because things are bad.”
Amazon’s results, along with reports from companies such as McDonald’s and Starbucks, signaled weakness in the US consumer, adding to concerns about a weak macroeconomic backdrop, he said.
Investors are already worried about hype-versus-reality in the tech sector, which contributes to sharp reactions when big companies underperform, said Burns McKinney, managing director and senior portfolio manager at NFJ. “Some of the earnings results that have come in over the past two weeks have reminded investors that there are too many high expectations built into these valuations,” he added.
Investors are excited about Meta’s results, including comments from CEO Mark Zuckerberg indicating that investment in artificial intelligence has helped drive targeted ad sales. Advanced Micro Devices gave chip stocks a boost on Wednesday after giving a positive earnings forecast.
The sharp market reaction does not mean that AI trading is over, Sarhan said. “On the contrary, it suggests a realignment of expectations,” he said. “We’re seeing a shift from pure hype to a need for tangible results.”