Jensen Huang, co-founder and chief executive of Nvidia, speaking in Las Vegas this week as his company became the world’s largest by market value
Jensen Huang, co-founder and chief executive of Nvidia, speaking in Las Vegas this week as his company became the world’s largest by market value © Bloomberg

Most of the stocks that were caught up in last year’s hype around artificial intelligence have fallen this year, suggesting that investors are increasingly trying to separate the wheat from the chaff among companies claiming to be beneficiaries of the AI trend.

Massive share price rallies for high-profile groups such as Nvidia, the chip designer that this week became the world’s most valuable listed company, have spurred a growing debate about whether the US stock market is being driven by speculative hype.

But the recent declines for dozens of stocks that had benefited from the early enthusiasm suggest that investors are starting to look past optimistic commentary if the companies cannot back up their claims.

“AI is still a big theme but if you can’t demonstrate evidence you’re getting hurt,” said Stuart Kaiser, head of US equity trading strategy at Citi. “Just saying ‘AI’ 15 times is not going to cut it any more.”

About 60 per cent of stocks in the S&P 500 have risen this year, but more than half the stocks included in Citi’s “AI Winners Basket” — an index based on the names that were garnering the most excitement among the bank’s clients last year — have declined. More than three-quarters of companies in the AI basket had climbed in 2023.

Investment funds that tried to pick a wide spread of AI beneficiaries have had a similar experience. More than half of the individual stocks in BlackRock’s Robotics and Artificial Intelligence ETF, Invesco’s AI and Next Gen Software fund, and First Trust and Nasdaq’s Artificial Intelligence and Robotics ETF have declined this year.

Mona Mahajan, senior investment strategist at Edward Jones, said: “Investors are looking a bit more at the earnings story among ‘AI’ names. The differentiator with something like a Nvidia is they have delivered on the bottom line, showing real data.”

Nvidia has more than doubled in value this year, after more than tripling in 2023, and its market cap is now well over $3tn. However, the massive demand for its graphics processing units is such that, measured as a multiple of its sales over the previous 12 months, the stock is actually cheaper than this time last year. 

In contrast, tech groups such as Salesforce, Snowflake, Intel and Adobe — now far smaller than Nvidia by market value, but classed as large-cap stocks — have fallen sharply after strong gains in 2023.

“In tech the bar was quite high [in earnings season] and if you missed that bar you got hit hard,” said Citi’s Kaiser. Salesforce suffered its worst one-day drop in 20 years after publishing a disappointing quarterly update last month.

Although some have taken the shift as a sign of rationality returning, Rob Arnott, chair of asset manager Research Affiliates, said the AI-linked rally still “has the look to me of a classic bubble”.

“One of the things about a classic bubble is you do see smaller players fade before big ones start to suffer,” he said.

Arnott stressed that he was a believer in the long-term impact of AI, but said “a lot of the benefits are going to come gradually, and the market is pricing in immediacy”.

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