Markets are witnessing a notable divergence in the AI sector, as hardware and chip stocks continue to soar while the shares of major AI spenders, often referred to as hyperscalers and the 'Magnificent Seven,' are underperforming. This shift signals a new phase for the AI trade, centered on investor sentiment regarding the substantial capital expenditure (capex) being poured into AI development. The Philadelphia Semiconductor Index, for instance, recorded an impressive 88% gain in the second quarter, marking its best-ever quarterly performance. In contrast, every Magnificent Seven stock has lagged the Nasdaq 100's 16% gain this year, with many experiencing double-digit declines, and the Roundhill Magnificent Seven ETF tumbling from its May peak.
Major tech giants including Amazon, Alphabet, Meta, and Microsoft, are projected to spend a staggering $725 billion on AI capex this year alone. Goldman Sachs estimates that by the end of the decade, the AI capex of these four companies could surpass the GDP of major economies like Japan. This aggressive spending, however, has led to investor concerns about return on investment and monetization, causing some hyperscaler stocks, such as Meta and Microsoft, to experience significant year-to-date losses of 5% and 18% respectively, with Microsoft even seeing its worst monthly loss since 2000 in June.
JPMorgan strategists describe this divergence as "somewhat unsustainable" and have presented two potential scenarios. The bullish outlook suggests that hyperscalers could improve AI monetization, leading their stocks to "catch up" with chip stocks. Conversely, a bearish scenario could see hyperscalers pulling back AI capex, which would negatively impact chip stocks. There are mixed views among Wall Street analysts, with some seeing this rotation as a positive market evolution, while others view it as a potential warning sign reminiscent of the dot-com crash in 1999-2000, when a similar split between hardware suppliers and heavy spenders occurred.
Art Hogan, Chief Market Strategist at B. Riley Wealth Management, likens the current market dynamic to a gold rush, where initial wealth flowed to those supplying tools, a parallel to the current strong performance of memory stocks like Micron Technology and SK Hynix. While some see the possibility of an "AI bubble" bursting, Hogan suggests it's more of an market evolution where only a few AI firms will ultimately emerge as true winners. Despite the overall stock market remaining near all-time highs, there are underlying signals, like the underperformance of many AI-related stocks over the past six months, that suggest the AI investment cycle might be nearing its conclusion.
