Wall Street Split: Optimism and Crash Warnings Coexist on AI Stocks
On Wall Street, optimism and pessimism over artificial intelligence (AI) stocks are sharply divided. Investment research firm Tributary Research believes AI stocks remain worth investing in, while brokerage BTIG argues that a bear market of sharply falling AI stock prices is coming and investors should prepare in advance.
Adam Parker, founder of Tributary Research, said on the 28th (local time) that the current AI investment cycle — a flow of investment marked by repeated booms and busts — is generally estimated at ten years, and that even if it ends in seven to eight years, it is only about halfway through. He pointed out that building large-scale data centers (massive server facilities) can take more than a decade, explaining that selling AI stocks in advance out of worry about the distant future is not wise. Parker believes the best moments of the AI investment era have yet to come. He emphasized that at the start of this year, only 15% of companies mentioned AI and productivity gains, and even now fewer than half of the S&P 500 companies have mentioned them. He added that the reasonable bull case for the S&P 500 rests on labor productivity not yet reflected in earnings, which allows corporate profits to stay above trend. Parker noted that although AI-related trading began in earnest in early 2023, the resulting productivity gains have not yet been fully reflected in earnings. True cost savings and productivity improvements, he explained, are not a thing of the past but part of the future still to come.
AI-related stocks have driven the stock market's bull run in recent years. Since May 2023, the S&P 500 has risen 84% and the technology sector 147%. Semiconductor stocks have quadrupled, with the VanEck Semiconductor ETF (SMH) up 335% and Nvidia up 647%. This October, however, the trend has shifted. While the S&P 500 is up modestly this month, investors have been trimming their AI holdings. SMH has fallen 11% this month, the tech sector is down 4.8%, and Nvidia has dropped more than 5%.
BTIG draws the opposite conclusion from this. Jonathan Krinsky, chief market technician at BTIG, analyzed that the pattern of a semiconductor index rising sharply and then immediately reversing with a 5% decline has occurred only four times in the past 30 years. In three of the four cases, which occurred between July and September 1995, stocks ultimately fell 53%. The remaining instance, following March 17, 2000 at the peak of the dot-com bubble, triggered an 83% decline. Krinsky stressed that the recent tech rally should not be seen simply as a buy signal but treated with strict caution as a possible precursor to a historic crash.
With optimism that the cycle is only halfway done coexisting with warnings of an impending crash, Wall Street is reading the same chart and arriving at very different diagnoses.
