Adria Cimino, The Motley Fool
5 min read
The S&P 500 has been on fire in recent years, rocketing higher amid enthusiasm about artificial intelligence (AI) companies — investors have seen this technology as the next big revolution, likening it to the printing press, the telephone, and the internet. The idea is that AI may transform the way many things are done across the business world and even throughout our daily lives. The result could be significant earnings growth for the developers and users of this hot technology.
Some companies have offered us a taste of this potential. Chip designer Nvidia and cloud computing player Alphabet are good examples, as their offerings of AI products and services have supercharged growth. As a result, investors have piled in, sending these stocks to triple-digit gains over the past three years.
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But, against this exciting backdrop, trouble could be brewing. In fact, the stock market just flashed a warning sign only seen once before in 155 years — and history is very clear about what happens next.
The AI boom
So, first, let’s take a quick look at the current and recent stock market environment. As mentioned, the S&P 500 has soared over the past few years amid the AI boom. But over the past several months, cracks have begun to appear in the earlier smooth surface. Headwinds have swept in, with some general and others more specific to AI companies.
Geopolitical tensions have made investors more cautious, prompting them to rotate into sectors seen as offering “safety,” such as healthcare. Patients always need their treatments and services, and this leads to ongoing revenue growth for companies in the industry — regardless of the economic backdrop. And speaking of the economy, investors have worried about the direction of interest rates as inflation gained ground — inflation in May reached its highest level in three years. And a new chair at the helm of the Federal Reserve — Kevin Warsh took on the role as Jerome Powell’s term came to an end — added to uncertainty as investors speculated about the direction of policy ahead.
Investors have also worried about technology companies’ levels of spending on AI and have questioned whether it will match the revenue opportunity over time. Alphabet, Microsoft, Meta Platforms, and Amazon announced spending of nearly $700 billion this year on AI build-outs. Though these and many other tech giants have reported solid earnings, and AI demand continues to climb, investors are more cautious about AI stocks than they were several quarters ago.
