The technology markets are showing signs of warning for the first time in months, as there seems to be a mismatch between growth expectations driven by AI and the reality of technology investment. While AI has immense potential and is likely to drive long-term investment for a decade or more, the markets have already reflected excessive optimism. There are several details that need to be worked out about AI, including costs, ROI, and legal issues regarding data.
The hope for a spending spree in AI to drive the next leg of the technology bull market has not materialized as expected. AI has so far been an elitist and speculative play, benefiting only a handful of companies. Many companies have failed to deliver the AI bump that investors had anticipated, leading to a potential reset on expectations as the hype around AI starts to abate in the near term.
The technology markets have been largely boosted by a handful of “AI elites,” including the largest cloud providers and hyperscale operators such as Amazon Web Services, Microsoft, Google Cloud, and Meta. These companies have invested billions of dollars in AI infrastructure, leaving smaller players struggling to keep up. The concentration of profits among these elite tech companies has skewed the entire S&P 500, with only a few companies providing most of the returns in the stock market rally.
While AI investment has surged in these elite companies, overall enterprise spending has slowed, leading to a decline in capital spending by the largest cloud service providers. Despite the large AI investments, many cloud providers have actually reduced their capital spending and laid off staff. This trend, coupled with profit concentration among a few tech giants, could pose a risk to the overall market if AI expectations fail to materialize.
In the first quarter earnings results of 2024, some companies have failed to meet investor expectations regarding AI growth. Examples include Adobe, AMD, Nvidia, and Snowflake, whose shares have dropped following disappointments in AI-related products or growth projections. While AI remains an elite infrastructure in enterprise technology, more pedestrian enterprise markets have seen setbacks, with segments such as networking and service providers experiencing decline.
As the second-quarter earnings season approaches, investors are looking for signs of a continuation of the early-year trend of disappointment in technology companies. The coming months will be crucial in determining whether the technology markets will rationalize the enthusiasm surrounding AI investment and whether the hype around AI will diminish. The great AI reset could reshape the technology markets and may result in a more balanced and stable environment for tech stocks.
