The global AI trade is starting to fracture as soaring capex, rising debt loads and doubts over who will profit from the technology force investors to draw sharper lines. Markets are now splitting across stocks, sectors and even regions.<\/p>\n
When ChatGPT launched in November, 2022, anything linked to the artificial intelligence<\/a> theme surged – from chipmakers and software firms to raw-materials suppliers and even companies most exposed to AI disruption.<\/p>\n That lifted equity and debt markets to levels that have drawn bubble warnings from regulators and investors, even as the likes of Microsoft MSFT-Q<\/a>, Amazon AMZN-Q<\/a>, Alphabet GOOGL-Q<\/a> and Meta META-Q<\/a> mapped out hundreds of billions of dollars in spending.<\/p>\n This week\u2019s market turmoil suggests the trade is hitting a turning point as investors weigh the promised AI payoff against its rapidly rising cost.<\/p>\n \u2018Picks and shovels\u2019 outperform<\/p>\n This week\u2019s rout in software stocks has widened the gap between AI \u201cpicks \u2019n shovels\u201d – hardware makers powering the AI data center build-out – and firms further down the supply chain.<\/p>\n In the U.S., ServiceNow NOW-N<\/a> and Salesforce CRM-N<\/a> have dropped 12 per cent and 9 per cent respectively this week. In Europe, data and analytics firms RELX and London Stock Exchange Group are down 16.4 per cent and 6.3 per cent.<\/p>\n The reversal is stark. Software, data and analytics groups were initially seen as AI beneficiaries, with hopes generative AI would bolster products and profits.<\/p>\n Semiconductor and data-center-exposed shares have also fallen this week, but far less, extending a gap already widening between enablers and potential casualties of AI.<\/p>\n \u201cThis divergence is not a vote against AI. It is a signal that investors are differentiating between who enables AI and who may be disrupted by it,\u201d Charu Chanana, chief investment strategist at Saxo, wrote in a note.<\/p>\n Barclays equity strategists said on Wednesday the same pattern was showing up across Europe, calling dispersion in the region\u2019s AI trade \u201cextreme.\u201d<\/p>\n Magnificent 7 no longer moving as one<\/p>\n The once-unified Magnificent 7 group of most valuable U.S. stocks is also diverging, as investors move from rewarding big capex announcements to scrutinizing the return on that spending.<\/p>\n Portfolio managers at Goldman Sachs Asset Management flagged in January that diverging AI and cloud strategies were breaking apart the Magnificent 7 narrative.<\/p>\n That has come into sharp focus. Microsoft and Meta both reported higher capex, yet Microsoft shares fell 10.4 per cent on Jan. 29 while Meta rose 10 per cent.<\/p>\n Google parent Alphabet posted a huge jump in capex on Thursday, sending its shares down as much as 8 per cent before they closed flat. Amazon\u2019s shares were down 8.5 per cent on Friday after announcing a more than 50-per-cent increase in this year\u2019s capex.<\/p>\n \u201cThere\u2019s going to be huge divergence … as a group they could well be market underperformers this year,\u201d Mark Hawtin, head of global equities at Liontrust, said of the seven stocks.<\/p>\n \u201cYou need to see a clear cause and effect. If they\u2019re spending the money, are they getting a return for it? The market is no longer tolerating spending for spending\u2019s sake.\u201d<\/p>\n