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Big Tech Titans Feel the Chill as AI Stocks Slide

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Key Points

  • Major tech stocks, including Apple, Broadcom, and Adobe, show declines as investors seek concrete proof of AI-generated revenue, not just potential.
  • AI chip leader Nvidia is in a different position, as it's actually shipping conductors to train AI language models, but its stock is still down.
  • Higher interest rates are also a factor in tech stocks' recent declines.
  • 5 stocks we like better than Adobe

You only need to look at the one-month decline in AI chip powerhouse Nvidia Corp. NASDAQ: NVDA to understand that something has changed. Is Nvidia's pullback a sign that the AI rally that fueled big tech sector gains is taking a breather as interest rates rise? 

After advancing as much as 244% this year, Nvidia stock is down 8.24% in the past month. 

Several of the big tech sector gainers rallied on the potential of AI, and are among the S&P 500 companies with the best 2023 returns. Those stocks amount to a lineup of the usual suspects Microsoft Corp. NASDAQ: MSFT, Amazon.com Inc. NASDAQ: AMZN, Alphabet Inc. NASDAQ: GOOGL and Meta Platforms Inc. NASDAQ: META, while also including chipmakers Broadcom Inc. NASDAQ: AVGO, Intel Corp. NASDAQ: INTC and Advanced Micro Devices Inc. NASDAQ: AMD.


In general, the tech sector is having a rough time lately.

Big Techs All Showing Weakness

The Technology Select Sector SPDR Fund NYSEARCA: XLK has posted a 6.95% month-to-date decline, the largest since December. In fact, the sector ETF has finished with gains in six months of this year, so the downward trend is notable. 

In the past month, all the sector's most heavily weighted stocks, Apple Inc. NASDAQ: AAPL, Microsoft, Nvidia, Broadcom, and Adobe Inc. NASDAQ: ADBE are all showing one-month declines of 1.42% or more. Drilling down even further, the 11 most heavily weighted S&P tech stocks are all showing monthly declines, which explains the poor sector performance.

On a one-month basis, the tech sector is underperforming the broader S&P 500.

So what's the takeaway here?

Two Factors Forcing Tech Drawdowns

Two things appear to be happening simultaneously, both of which are affecting tech and AI-related stocks.

First, the thrill of any-and-all-things AI is gone. 

According to data compiled by Reuters, the terms "AI" or "artificial intelligence" were mentioned 827 times on 76 earnings calls in the weeks leading up to August 1. Although companies are in the process of deploying AI-related applications and want to inform investors, some of those mentions may have an element of jumping on a popular bandwagon to boost the stock's price. 

Regardless, investors seem to be demanding proof of AI-generated revenue rather than vague mentions of future potential. 

For example, Palantir Technologies Inc. NYSE: PLTR got a boost in late July and early August after an analyst asserted that the data analytics specialist was an undiscovered AI gem. 

Investors Want Results, Not Vague Promises

However, Palantir stock ended the month of August down 24.50%, as investors became weary of comments such as that of Palantir CEO Alex Karp in the most recent earnings report.

"We will figure out how to monetize it," Karp said, referring to AI.

The second thing that is battering tech stocks is a renewed belief that the Federal Reserve is not done raising interest rates.

High interest rates negatively impact tech stocks for several reasons. For starters, they increase borrowing costs for tech companies, which often rely on debt for expansion and innovation. Higher interest payments can erode profits.

Second, rising rates make bonds and other fixed-income investments more attractive, drawing institutional investors away from tech stocks. This can lead to a decline in tech stock prices as demand wanes.

Entering New Risk Averse Era?

Finally, high interest rates can slow overall economic growth, affecting consumer and business spending. That, in turn, leads to big investors becoming more risk-averse, reducing their appetite for volatile tech stocks. 

It wasn't that long ago that cloud and cybersecurity stocks fell because investors believed businesses would slash spending on those areas in a recession.

Those stocks since bounced back but are once again under selling pressure.  

The era of AI is just getting underway, so it's way too early to say 2023's AI mania was a bubble that will never be repeated. However, we may see the beginning of normalization when it comes to investor valuation of stocks simply because they have some sort of AI exposure.

One reason for the continued optimism about Nvidia, which is expected to grow earnings by 187% this year, is that the chipmaker is actually shipping products that are training AI models in customers' data stacks. 

That's more that can be said for companies simply mentioning AI in their earnings calls without having any monetization strategy because they knew it would catch attention. 

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Companies Mentioned in This Article

CompanyMarketRank™Current PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Adobe (ADBE)
4.7634 of 5 stars
$445.87-6.6%N/A42.63Moderate Buy$620.72
Alphabet (GOOGL)
3.7391 of 5 stars
$172.11-2.2%N/A26.40Moderate Buy$191.57
Amazon.com (AMZN)
4.6153 of 5 stars
$179.32-1.5%N/A50.23Buy$211.62
Apple (AAPL)
4.5968 of 5 stars
$191.29+0.5%0.52%29.75Moderate Buy$205.44
Broadcom (AVGO)
4.8793 of 5 stars
$1,364.08-1.9%1.54%50.56Moderate Buy$1,296.91
Intel (INTC)
4.9694 of 5 stars
$30.19+0.2%1.66%31.45Hold$39.58
Microsoft (MSFT)
4.9606 of 5 stars
$414.67-3.4%0.72%35.90Moderate Buy$454.70
Palantir Technologies (PLTR)
2.3161 of 5 stars
$21.73+3.7%N/A181.06Reduce$20.65
Technology Select Sector SPDR Fund (XLK)N/A$209.83-2.3%0.61%36.81HoldN/A
NVIDIA (NVDA)
4.6322 of 5 stars
$1,105.00-3.8%0.01%64.62Moderate Buy$1,123.49
Meta Platforms (META)
3.281 of 5 stars
$467.05-1.5%0.43%26.83Moderate Buy$509.80
Advanced Micro Devices (AMD)
4.6136 of 5 stars
$166.75+1.0%N/A245.22Moderate Buy$185.26
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Kate Stalter

About Kate Stalter

  • stalterkate@gmail.com

Contributing Author

Retirement, Asset Allocation, and Tax Strategies

Experience

Kate Stalter has been a contributing writer for MarketBeat since 2021.

Additional Experience

Series 65-licensed investment advisor, financial advisor, Blue Marlin Advisors; investment columnist for Forbes, U.S. News & World Report

Areas of Expertise

Asset allocation, technical and fundamental analysis, retirement strategies, income generation, risk management, sector and industry analysis

Education

Bachelor of Arts, Saint Mary’s College, Notre Dame, Indiana; Master of Business Adminstration, Kellogg School of Management at Northwestern University

Past Experience

Founder, financial advisor for Better Money Decisions; editor, stock trading instructor for Investor’s Business Daily; columnist, podcast host, video host for MoneyShow.com; contributor for Morningstar magazine


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