Investors are exhibiting a "lot of panic around the AI investment," leading to a challenging market for hyperscalers such as Alphabet, Microsoft, Meta, Apple, and Amazon. Despite Alphabet reporting its largest quarterly revenue in company history, with cloud revenue up 82%, its stock declined. This downturn was attributed by traders to the substantial capital expenditure, which Alphabet raised to as much as $205 billion for this year, up from $91 billion in 2025, with further increases expected for 2027. Moody's projects the six largest hyperscalers will spend approximately $785 billion this year, nearing $1 trillion by 2027, raising concerns about the ultimate return on these investments.
This trend suggests a shift in market dynamics. Wells Fargo’s Ohsung Kwon noted that the correlation between hyperscalers and semiconductors has fallen to an all-time low of -31% this month. For a period, the prevailing investment strategy was to "buy the semis and sell the hyperscalers," implying that semiconductors were benefiting at the expense of hyperscalers. However, Kwon now believes this trade is nearing its end, emphasizing that if the market is truly trading on hyperscaler return on investment, then hyperscalers and semiconductors should move in tandem.
Analysts like Luria argue that some market reactions, such as the initial negative response to Nvidia's deal, are being misinterpreted. Luria suggests that Nvidia's backstop is not an obligation it expects to fund, but rather a financial instrument designed to lower its customers' cost of capital and facilitate easier access to funding. This indicates a focus on enabling growth in the AI infrastructure rather than directly bearing the financial burden of all capital expenditures.
The broader market, particularly the S&P 500, is showing resilience despite the semiconductor sell-off. This is attributed to the diversified nature of the S&P 500, with gains from software, financials, and consumer discretionary stocks offsetting declines in chipmakers like Nvidia, AMD, and Broadcom. Economic data remains robust, and expectations for Federal Reserve rate cuts, along with strong corporate profit growth, continue to draw money into equities. Some analysts view the semiconductor rout as a repricing of AI infrastructure expectations rather than a sign of a broader economic downturn.
