Update Oct 12 2024 Is the AI trade ending ?

"Sell all my artificial intelligence stocks now"

The Artificial Intelligence (AI) trade may have hit the rocks. As detailed here in Money Matters a few weeks back, AI was all the rage the last few months when it came to trading stocks. I mentioned in my previous article the AI trade looked, felt and smelled like a mania. Like so many manias before it and throughout time, manias are times when everybody and their grandmother pile into the hottest stock sector like there’s no tomorrow.

But there always is a tomorrow, and that tomorrow began last month.

Stocks like NVDIA, AMD, and a handful of stocks that had anything to do with or even mentioned AI shot to the moon and appeared headed for Mars. Up and away many of these high flyers went, led by the stratospheric rise of NVDIA.

There is no doubt investors in stocks like these made money. And some, a lot of money. Such is always the case with stock manias. The age old game of “pile on” was played by many, and soon, common sense and historical precedent was tossed out the proverbial window. Investors and analysts alike knew it would end at some point, but like the CEO of Citibank Chuck Prince said in 2007 as it related to the real estate mania and the investments that fueled it, , “As long as the music is playing, you've got to get up and dance. (But) when the music stops, in terms of liquidity, things will be complicated”.

Complicated Mr. Prince?

How about catastrophic.

We all know what happened then. With the financial systems of the world in free fall, the central banks of the world embarked on one of the biggest bailouts in history. Well, that was until CoVid hit.

The mania in AI is obviously nothing like the 2008/09 fiasco, but only in degrees. This recent AI mania didn’t threaten to bring the world to an end, but AI stocks have suffered some setback in recent months. We can only guess if the fall out is over.

What is hitting the AI enthusiasm is stocks like NVDIA saw some stellar increases in revenue, and those increases were reflected in their stock prices. But the other side of the equation is will these companies be able to continue to reap the rewards of AI revenue. Some analysts argue the return on investment is yet to be seen.

In other words, its true many companies are spending billions on AI infrastructure which has boosted sales to the AI stocks which make the microchips that are required for the advanced language comprehension.  These advanced chips make up much of this AI infrastructure spending as they are quite pricey.

But what remains to be seen is are the companies that are spending billions buying these chips able to turn around and reap the massive profits needed to make the AI investment worth the money.

The answer to that question remains to be seen. We never know how the consumer will react to AI and whether the demand will be there and able to generate revenue for the companies that will use AI.

Maybe they will and maybe they won’t. But if AI turns out to be a pie in the sky pipedream that will fail to turn out the increased profit to justify the investment, it’s possible we could be looking at a very large balloon busting in a very large way.

Only time will tell of course and ain’t that what the stock market is all about?

For now however, AI stocks seem to be regaining a little ground from the recent hammering but the term caveat emptor is still in play.

In English, that’s buyer beware.

Tread lightly when it comes to stock manias. They always end in some way or another making fools of somebody.

  “Watching the markets so you don’t have to”    

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(As mentioned please use the below disclaimer exactly) THANKS   (Regulations)    

This article expresses the opinion of Marc Cuniberti and is not meant as investment advice, or a recommendation to buy or sell any securities, nor represents the opinion of any bank, investment firm or RIA, nor this media outlet, its staff, members or underwriters. Mr. Cuniberti holds a B.A. in Economics with honors, 1979, and California Insurance License #0L34249 His insurance agency is BAP INC. insurance services.  Email: news@moneymanagementradio.com

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