Tech stocks are plummeting. Is AI to blame?
Shares of artificial intelligence chipmakers plunged worldwide on Tuesday, dragging down major stock indexes and drawing fresh scrutiny of the AI industry.
Top semiconductor firms Micron and Sandisk saw shares tumble more than 10% in afternoon trading. Even Nvidia, the high-flying leader in the AI chip race, saw its share value drop 3% on Tuesday.
In all, the tech-heavy Nasdaq declined 1.4% as of Tuesday afternoon, while the S&P 500 fell nearly 1%. The slide came after South Korea’s benchmark KOSP index plummeted nearly 10%.
Some analysts who spoke to ABC News attributed the drawdown to a phenomenon called profit-taking, when traders sell off some of their shares to lock in returns after a prolonged run-up in price.
The downturn may also reflect jitters about immense investment in AI, the analysts added, especially as Wall Street anticipates a possible hike in interest rates later this year. That in turn could make it more expensive for firms to borrow the money necessary to develop the cost-intensive technology.
“Today is a downdraft, not a crash,” Steve Sosnick, chief strategist at trading firm Interactive Brokers, told ABC News. “On the other hand, I do think it’s fair to question whether the return on investment on all this money being thrown at AI is indeed sustainable.”
Despite the selloff on Tuesday, chipmakers' shares stand well above their prices at the outset of this year, suggesting the downturn marks a moment of caution rather than a dramatic shift in sentiment toward AI, some analysts said.
Micron has soared 277% in value this year. Sandisk has climbed a staggering 735% over that period. Nvidia, the world’s largest company by market capitalization, at a value of $4.8 trillion, has seen its shares jump 8% in value this year.
Chipmakers were bound to hit a rough patch after such a meteoric rise, Bret Kenwell, an investing analyst at eToro, told ABC News.
“I don’t think this is unreasonable, given how much of a run we’ve seen,” Kenwell said.
Still, some analysts voiced caution about the outlook for the AI sector, which has garnered trillions of dollars of investment but has yet to deliver profits on a similar scale.
Critics say the considerable costs have put pressure on AI to deliver stratospheric profits, but there is little evidence to suggest businesses or everyday users will get enough value to warrant forking over a mountain of cash. The technology must deliver within years rather than decades, critics add, since the current level of spending cannot be sustained.
Roughly 95% of businesses invested in AI had so far failed to make money off of the technology, an MIT study last year found. It estimated the combined financial investment in AI by those businesses at around $40 billion.
Renewed scrutiny over AI-associated costs arrives as expectations have ratcheted up regarding a possible interest rate hike this year.
Futures markets peg the odds of an interest rate hike in September at about 50%, according to the CME Group's FedWatch Tool, a measure of investor sentiment. Those odds have risen since last week, when Fed Chair Kevin Warsh voiced commitment to address inflation at his first meeting at the helm of the central bank.
“The capital being spent on AI is enormous. What’s the cost of capital? It doesn’t look like it’s getting any cheaper in the near term,” Mike Loukas, CEO of TrueMark Investments, told ABC News.
Analysts differed regarding the extent of concern about AI stoked by the tech selloff. Some noted a shift in sentiment as optimism begins to dampen, while others shrugged off what they view as a temporary blip.
"In this market we will continue to go through a number of 'gut-check moments' in the tech trade as the AI Revolution remains in the 3rd inning," Dan Ives, a managing director of equity research at investment firm Wedbush, told clients on Tuesday in a statement shared with ABC News. "This morning is just another one of those moments."
