In a week of market turmoil, tech stocks faced a significant downturn, sparking further debates about the stability of the AI boom. The catalyst? A confluence of events, from Japan’s interest rate hike to disappointing US jobs data, set against a backdrop of ongoing economic uncertainty.
Let’s summarise the sequence of events:
- Japan raised interest rates to 0.25% last week
- Rumours first emerged of a design flaw in Nvidia’s new Blackwell chip that could result in a 3-month delay in shipments
- The OECD’s leading indicator signalled a weaker US economic outlook
- Former tech giant Intel reported a $1.6 billion Q2 loss and planning 15% workforce reduction (despite a recent injection of federal cash from the CHIPS act)
- Disappointing US jobs data heightened economic concerns
- The US Fed failed to cut interest rates
- Of the back of the BOJ’s decision the yen surged, forcing investors who borrowed yen for tech investments to sell
- Japanese stocks suffered their biggest daily loss since 1987
- Widespread selling driven by these factors created a snowball effect
- Investors and algo trades rotated out of tech into ‘safer’ sectors
- Falling big-tech stocks, where 30% of the S&P is concentrated (some $14 trillion) dragged down indices, triggering further cross-sector selling
- As of Friday, US jobs numbers improved slightly, and stocks had re-bounded somewhat with the tech sector at +14% YTD
This sequence highlights how global economic factors, fiscal decisions, and market dynamics interacted to create a significant market event. Today tech stocks are a huge deal and conversely, any concerns about economic growth will downgrade outlooks for the tech platforms that power every industry. Plus, to a degree the tech correction also reflects the longer-term trend of struggling SaaS firms and the reduced VC deal flows seen in 2024 (somewhat at odds with the default narrative of excessive AI investment).
But is this all of this merely a short-term economic correction or a sign of deeper issues in the AI landscape? As we explored back in July, lazy comparisons to the dot-com bubble and AI ignorance abound. Andrew Odlyzko, a professor of mathematics at the University of Minnesota and expert on economic bubbles, argues that the AI situation more closely mirrors the early days of electricity – a fundamental shift in how we harness and apply technology.
At ExoBrain we believe that what we’re witnessing with AI isn’t a market cycle, but a fundamental reorganisation of how compute power is applied and valued in the economy. Market turbulence will likely continue as a result of the new, unpredictable and recursive evolution of multiple new technologies, which will drive what we’ll look back on as ‘creative destruction’.
There will be failures. Intel has been caught out by this new wave and has made the wrong calls. Nvidia may have dropped the ball somewhat rushing to ship their next generation chip. The pure-play AI companies like OpenAI and Anthropic face intense competition, uncertainty on profit mechanisms, and the cost of pushing the frontier forward remains huge while the next generation of more efficient AI chips are not yet deployed (and now delayed).
Yet, amidst this uncertainty, the tech giants remain well-positioned to weather the storm. Their diversified business models, cash (and data) reserves, and essential role in global business infrastructure provide a buffer against short-term volatility. Amazon, Google, Microsoft, and Meta have all signalled their intention to continue heavy investment in infrastructure. They are scaling up their capital expenditures significantly, with a focus on servers and datacentres to support growing cloud demand across the board. While some are developing their own custom AI chips, Nvidia’s GPUs remain a critical component of their infrastructure. The reported Blackwell delay is likely to be a temporary setback in the broader context of sustained demand for high-performance compute.
Takeaways: For investors and business leaders, the critical challenge is to differentiate between market blips and broader economic shifts (and the simplistic theories that people and traders latch onto), and the long-term transformative potential of AI. While caution is advisable, abandoning AI investments at this juncture would be short sighted. As we consistently highlight in this newsletter, we are merely at the dawn of a compute-driven revolution. Now is not the time to blink first.