AI Stock Frenzy Fades as Investors Scrutinize Earnings and Fundamentals

The artificial intelligence frenzy has propelled Nvidia to become the world’s most valuable company, but many other stocks hyped as AI winners have seen their share prices fall this year as investors become more selective.

Nvidia’s rise contrasts with broader AI stock declines: While Nvidia’s stock has more than doubled in value this year, over half of the companies in various AI-focused stock indices and ETFs have seen their share prices decline in 2023, suggesting that investors are looking more closely at companies’ actual AI capabilities and earnings potential.

• About 60% of S&P 500 stocks have risen this year, but more than half the stocks in Citi’s “AI Winners Basket” index have fallen. In 2023, over 75% of the basket’s companies had climbed.
• Several AI-focused ETFs from major asset managers have seen the majority of their individual stock holdings decline year-to-date, even as the AI theme remains popular among investors.

Earnings and fundamentals matter more now: Analysts note that companies now need to demonstrate real evidence of AI-driven growth and profitability, not just mention AI frequently, to see their stocks rise. Firms that disappoint on earnings are getting punished.

• Nvidia’s strong demand for its AI chips means its stock is actually cheaper relative to sales than a year ago, despite a massive run-up in market value to over $3 trillion.
• In contrast, large-cap tech firms like Salesforce, Snowflake, Intel and Adobe have fallen sharply this year after failing to meet high expectations, even as they tout their AI exposure.

Mixed views on the AI-linked stock rally: Some see the market starting to differentiate between real AI winners and losers as a sign of rationality returning. However, others still view the AI rally as a potential bubble, noting that the benefits of the technology will accrue gradually while stocks are priced for immediate impact.