The upcoming decisions from the Federal Reserve and key tech firms, including Alphabet, Microsoft, and Amazon, are expected to significantly impact the AI trade, prompting investors to reassess risks and opportunities. Under the hood of these decisions lies a complex web of factors, including the technical reality of AI spending and its potential impact on the market.
Market Uncertainty
Investors are facing uncertainty as tech firms continue to increase their spending on AI, despite weaker demand for computers. According to a report by TS Lombard, the AI investment boom could end, resulting in a significant decline in US stocks, with the S&P 500 potentially falling by at least 30% and wiping out around $20 trillion in market value. The technical reality is that this decline would be driven by a combination of factors, including the high levels of spending on AI and the potential for a downturn in the tech sector.
AI Spending And Earnings
Major tech companies, including Meta, Alphabet, Oracle, Amazon, and Microsoft, have committed to spending $800 billion on AI this year, with Alphabet alone planning to spend up to $205 billion. However, the earnings of these companies have not always met analysts’ expectations, spooking investors and creating fears of an AI bubble. As ever, the detail that matters is the balance between spending and revenue growth. For example, Amazon reported a 13.9% operating margin and AWS revenue surged 39%, but its stock still fell after the earnings report.
Investor Advice
Market experts are warning investors to maintain a normal amount of risk through diversified global stocks, rather than trying to time the market or bet against tech too early. TS Lombard advises investors to hold a normal amount of risk and add government bonds only once signs of fragility emerge. This approach is based on the assumption that the AI boom will eventually end, but the timing is uncertain. As the technical reality of the market dictates, investors should focus on the detail that matters, such as the balance between spending and revenue growth, rather than trying to predict the exact timing of the boom’s end.
Next Steps
The next few days will be crucial in determining the direction of the AI trade, with the Fed’s decision and earnings reports from Alphabet, Microsoft, and Amazon expected to provide clarity on the market’s trajectory. Investors will be closely watching the spending plans and financial performance of these tech giants, as well as the messaging from Fed Chair Kevin Warsh, to gauge the potential risks and opportunities in the AI trade. The Fed’s decision is scheduled for Wednesday, and investors will be eagerly awaiting the outcome to inform their investment decisions.
Sources
- Fed decision and Alphabet, Microsoft, Amazon earnings could shake up the AI trade over the next 48 hours
- What Musk's neocloud warning means for investors
- A Wall Street Firm Modeled Out an AI Crash: S&P 500 Down 30%, $20 Trillion Gone. But Here's What Happens Next | The Motley Fool
- US tech stocks see sharp falls as AI spending nears $1tn
- Amazon Stock Fell After Earnings. Jim Cramer Says Buy Right Here
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