The artificial intelligence (AI) trade, which has driven markets ever since Nvidia (NVDA) posted that epic beat in its fiscal first-quarter 2024 earnings report in May 2023, is getting a reality check this earnings season. There has been across-the-board disappointment from Meta Platforms (META), Amazon (AMZN), Tesla (TSLA), and Alphabet (GOOG) (GOOGL). Microsoft (MSFT) did come up with a good set of numbers, but the pre-earnings rally captured that optimism, and the stock closed lower after what was otherwise a strong report.
www.barchart.comAmazon and Alphabet Missed Q3 Estimates
Amazon and Alphabet were real duds this time around and missed on most metrics. The last thing markets want from these two companies that plan to spend upwards of $200 billion on capex this year is an earnings miss, and the stocks got punished accordingly. Intel (INTC) — which made its way into the AI trade — also plunged following the Q3 earnings on weak guidance, which the company blamed on the slowdown in PC sales.
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Notably, while AI plays — barring some chip and memory names — have sagged this year, the “anti-AI” trade has been in action in recent months, and names like Accenture (ACN) and Adobe (ADBE) have risen sharply from their 2026 lows.
The September quarter earnings and the resultant crash in Big Tech stocks prompt a question: is the AI trade dead for good, or are these names taking a breather and giving a good buying opportunity in the process? Let’s explore.
What’s Going on With AI Stocks?
The trend we’re seeing this earnings season is no different from the June quarter. Markets have given an unequivocal message on AI and want more signs of monetization and are not buying into mere cloud growth, particularly as some of that growth is being proxy-funded by hyperscalers themselves through their investments in AI startups.
Markets are particularly unforgiving of slowdowns in core businesses, for instance, e-commerce for Amazon, search for Alphabet, and PC chips for Intel. Meta’s core business is doing relatively well, and it finally called for peak Reality Labs losses, projecting that segment’s losses to taper down from here. However, it has plenty of legal woes to address, plus its AI capex as a percentage of revenues is the highest among hyperscalers, which makes markets wary of the Mark Zuckerberg-led company.
On AI capex, investors are getting increasingly restive as that number has only been going up and companies have guided for further ramp-up next year. The attention has shifted to AI companies returning to generating positive free cash flows. Incidentally, apart from Microsoft, which expects to generate positive free cash flows next year, no other hyperscaler has provided a timeline, and if anything, Alphabet talked about its free cash flows remaining under “pressure” as it ramps up AI capex. Tech giants that pushed U.S. buybacks to record highs are now posting mind-boggling cash burn, with Amazon reporting negative free cash flows of $42.4 billion in the September quarter.
www.barchart.comIs the AI Trade Dead?
Signs of exuberance in the AI trade have been visible for quite some time now. Things are getting problematic now for two main reasons. First, interest rates are on an upward trajectory, which means that there won’t be any easy money to fund the AI buildout. Second, the macro environment has worsened as higher energy prices have pushed inflation and are hurting consumer spending on other goods. Some of the core-business slowdown tech companies are witnessing is also attributable to the macro slowdown, which is taking a toll on overall economic activity and is not limited to tech.
That said, I still don’t buy the argument that the AI trade is dead for good, even though I believe the capex spree is getting out of control and not every company would be able to generate an attractive return on that investment. As for buying the dip in AI names, I am proceeding cautiously and making incremental purchases while keeping some dry powder for any further weakness.
On the date of publication, Mohit Oberoi had a position in: NVDA , META , MSFT , AMZN , GOOG , TSLA . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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