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Artificial Intelligence Stocks Experience Speed Bumps as Earnings Season Goes On

The artificial intelligence (AI)-driven rally that propelled stocks to new heights earlier this year is facing obstacles as companies report their second-quarter earnings. The stock market, especially those in the tech sector, has been closely monitoring the impact of AI on revenue and market growth.

Microsoft, a leading software company, recently informed investors that AI contributions to revenue will be gradual. On the other hand, AMD, a prominent player in AI accelerators, predicts the market to reach over $150 billion by 2027. Despite these positive long-term projections, AMD’s stock plummeted by more than 7% in the subsequent trading session due to concerns that expectations had become too high.

Reflecting this uncertainty, the Nasdaq Composite has dropped nearly 2% in the past two weeks, coinciding with the release of big tech earnings reports. These developments may indicate a possible bursting of the AI stock bubble.

Morgan Stanley equity strategist Edward Stanley analyzed 70 previous market bubbles over the last century, including the dot-com surge and recent cryptocurrency frenzy. According to Stanley, the median return in three years for these bubbles was 154%. Comparatively, Nvidia, whose stock has surged by 200% this year, serves as an indicator of the AI boom’s progress. Stanley suggests that the AI stock rally is likely entering its “late innings.”

However, Stanley believes that the AI bubble of 2023 is different from previous bubbles. One of the challenges lies in accurately gauging the rally’s extent, particularly considering that the AI index tracked by Morgan Stanley has only risen by 50% this year, unlike the substantial surge in large-cap tech stocks.

Stanley wrote, “Judging where we are on the run-up in market exuberance is extremely challenging. This is the case with AI today. Many investors would be forgiven for thinking AI investment funds are making new all-time highs on the back of Generative AI excitement. In fact, (they’re) not. Several underlying stocks are, but as an investment theme, performance is still 14% below prior market high.”

Wall Street Interest Cools Down

In 2023, AI has been a buzzword on Wall Street. This trend prompted strategists to revise their outlook on the S&P 500. Roundhill introduced a trendy ETF called CHAT, and investors delved deep into the tech sector in search of the next AI breakthrough.

Entering the second quarter earnings season, enthusiasm surrounding AI appeared to continue driving stock gains. For example, Apple’s stock increased by approximately 1% following a Bloomberg report about the company’s development of its ChatGPT AI system. Similarly, Microsoft shares surged by about 4% when the company disclosed pricing details for its M365 Copilot AI product. These positive developments coincided with record highs for both stocks.

However, when asked for specific details about AI projects, Apple CEO Tim Cook remained tight-lipped. While acknowledging the significance of AI and machine learning in their product lineup, Cook refrained from discussing upcoming endeavors like the ChatGPT-style bot mentioned in the Bloomberg report.

Companies that have marketed their AI achievements have not necessarily reaped the expected benefits this quarter. With the exception of Meta, which attributed its increased revenues to AI, investors appear more concerned about the current state of affairs rather than potential future AI advantages.

Snap claimed that over 150 million users have interacted with its My AI chatbot. Nevertheless, the market primarily focused on the costs associated with this investment. Consequently, Snap’s stock dropped by more than 14% following its earnings report.

Furthermore, momentum has slowed for some of the industry’s major players as they approach their earnings announcements. For instance, Nvidia, whose AI prospects have driven its stock to rise by over 200% this year, experienced a 4% decline in the past week and a mere 6% increase over the past month. Analysts suggest that this might signal a temporary pause in the stock’s meteoric rise.

Given these developments, it is increasingly important for investors to understand the complexities of the AI-driven market. This is where the AI legalese decoder can be of great assistance. The Decoder helps interpret and simplify legal jargon in AI-related contracts, allowing investors to better comprehend the risks and potential returns associated with AI investments. By removing language barriers and providing clear insights, the Decoder empowers investors to make more informed decisions in this rapidly evolving market.

Josh Schafer is a reporter for Yahoo Finance.

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