A small but much-needed dose of reality was administered in markets towards the end of the week as tech stocks, particularly those popular with investors who have looked to make short-term gains from the artificial intelligence (AI) boom, sold off.
Many will be wondering whether the air is officially coming out of the vaunted AI bubble.
Analysts see the slump as an unwinding of momentum trades on semiconductor companies. Simply put, this is a strategy where investors bet big on companies – in this case, the makers of the memory chips crucial to the buildout of the computing power necessary to support AI – that are already performing well.
Rather than the old adage of buy low, sell high, momentum trades involve traders and investors betting that the best-performing stocks will extend their gains.
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That leaves a lot of people exposed to the elements if the wind changes direction, as it did during the week. On Thursday and Friday, there was a disorderly scramble to exit positions in US chipmakers such as Micron and Nvidia, which had helped power Wall Street indices to new records earlier in the year. Precisely what triggered the reversal in the first place is hard to pin down to one factor.
Suffice it to say for the moment that there is growing concern about whether the so-called AI hyperscalers will ever be able to deliver the returns promised by their increasingly lofty valuations.
Whether or not this is the start of something more serious is difficult to predict. Regardless, the bloodletting this week should remind us that there is a growing disconnect between what’s occurring in equity markets and objective reality.
In an Irish context, it’s worth recalling what the Central Bank of Ireland said last month in its first financial stability review of the year. It warned that runaway stock market valuations, particularly related to AI, amplify the risk of a “disorderly correction” in global markets, spilling over into the Irish financial system.
That risk is even greater given the ongoing Middle East conflict, which again threatens to starve the global economy of oil and plunge it into an inflationary spiral.
In the face of all of that, it seems a lot like markets have been in a fantasy this year and that reality is beginning to bite.
