Investors are going to have to get a lot more \u200bdiscerning when it comes to artificial intelligence bets, because the inclusive narrative \u200dthat drove the widespread boom in U.S. tech stocks last year is over. AI\u2019s rising tide no longer lifts all boats, and those that are sailing along smoothly one quarter could find themselves sunk the next.<\/p>\n
This week\u2019s so-called \u2018software-mageddon\u2019 has wiped roughly US$800-billion of market capitalization from the S&P 500 software and services index, with notable \u200dlosses among \u200bcompanies like Oracle (ORCL-N<\/a>), Inuit (INTU-Q<\/a>) and ServiceNow (NOW-N<\/a>). According to SocGen, the software sector is having its worst performance against the wider S&P 500 index in 25 years.<\/p>\n The root of the latest churn appears to be a new tool from the AI leader Anthropic, a legal plug-in for its Claude AI service that can automate a lot of legal work and, over time, services provided by software firms in sales, marketing, and data analysis.<\/p>\n But this week\u2019s slump is not simply about a new, mostly unproven, plug-in. It\u2019s a sign of investors\u2019 \u2060realization that the AI revolution is entering a new phase where the tech world is splintering, between AI disruptors and AI casualties.<\/p>\n Simply buying an index fund and watching it rise on the back of the megacap tech boom is no longer an optimum strategy. Investors will have to pick winners and eschew losers, determining where AI will enhance and where it will disrupt. In other words, after a decade of bumper passive investing returns, active management may once again have its day.<\/p>\n The problem, of course, is that \u200cno one knows how this particular cookie will \u200dcrumble. AI technology is in its infancy, and its ultimate impact is still unknown. What that means is that today\u2019s winners may be tomorrow\u2019s losers \u2013 \u200dsuch is the bewildering pace of change.<\/p>\n Look at how shares in Facebook owner Meta \u200c(META-Q<\/a>) have traded the day following their last two earnings releases. Promises of hefty investment in AI and data centrE construction sparked \u2060an 11-per-cent slump on October 30, while a similarly aggressive spending pledge triggered a 10-per-cent surge on January 29.<\/p>\n Take Microsoft (MSFT-Q<\/a>). Its apparent first-mover AI advantage among the \u2018Magnificent 7\u2019 helped push its \u200bmarket cap above US$4-trillion last year, but its share price has tanked 25 per cent in the last three months as investors have questioned whether its massive capex will pay off.<\/p>\n This week\u2019s volatility may shine a spotlight on the divergence among sectors and individual names, but, in reality, this trend has been building for a while.<\/p>\n Over the last three months, the S&P 500 tech index is up 9 per cent, while the communications services index is down 10 per cent. And the correlation between the six biggest U.S. \u200btech firms – Amazon, Apple (AAPL-Q<\/a>), Alphabet (GOOGL-Q<\/a>), Meta, Microsoft, and Nvidia (NVDA-Q<\/a>) – has collapsed to the lowest in at least a decade, according to Barclays equity strategists.<\/p>\n They expect the shift away from the \u2018rising tide\u2019 narrative to continue, creating a \u201chigh-tech, high-stakes market\u201d that should give fund managers scope for more individual stock and thematic investment strategies.<\/p>\n Manish Kabra at SocGen reckons the picture essentially boils down to this: a global software sell-off on one side, and a global semiconductor boom on the other.<\/p>\n In theory, this should be good news for investors. In times of sectoral dislocation, correlation breakdowns and fluid price moves, bargains and arbitrage opportunities can be found. It\u2019s the proverbial \u2018stock picker\u2019s market.\u2019<\/p>\n