J.P. Morgan analysts, led by Mislav Matejka, indicate that the recent decline in the global AI market has led to improved investor positioning and attractive valuations, potentially leading to a resurgence, especially in semiconductor stocks. They suggest that although technology may not reach its previous levels of success, the fundamental case for AI remains strong with numerous opportunities.
Investor sentiment in AI has been volatile, described as "AI Whiplash," swinging from fear to excitement. This was evident when concerns about a slowdown in AI development, voiced by industry leaders, caused a 1.5% drop in the Nasdaq 100 Index between September 14 and 15, erasing over $600 billion in market value. However, excitement returned following the success of Meta Platforms' Muse personal assistant, with Meta's shares jumping 11% and the Philadelphia Stock Exchange Semiconductor Index gaining 6%.
Technology-focused US exchange-traded funds attracted $22 billion in inflows during the third quarter through mid-September, significantly dwarfing the $4.6 billion directed toward all other sectors. This highlights a narrow focus of current equity flows. US equity funds overall saw nearly $64 billion in weekly flows through September 16, marking the strongest three-month reading, while cash experienced its largest outflow in nine weeks.
J.P. Morgan believes the three-month stall in technology shares has run its course, and investors should consider re-entering the sector. They emphasize that spending on AI infrastructure is expected to remain robust despite recent slowdown headlines, and earnings continue to be strong. Matejka advises reopening a trade betting on semiconductors outperforming software, noting that forward earnings estimates for chip companies have risen by 30% since June, while software has seen minimal uplift.
The success of Meta's Muse, which surpassed ChatGPT to become the top free app in the US, signals that consumer AI adoption could translate investment into future growth and earnings. This has also positively impacted CPU companies like Advanced Micro Devices and Intel, which saw surges of 34.56% and 40.50% respectively over the past month, broadening the beneficiaries of rising AI usage beyond GPUs.
