Nvidia can't save AI stocks. What does the market want to see?

Even Nvidia, the core of the artificial intelligence (AI) wave, failed to ease market anxiety with its impressive performance. Last week, after reporting strong earnings, Nvidia’s share price surged more than 5% last Thursday, but then quickly reversed course, closing down 3.2%. This roller-coaster trend swiftly transmitted across the broader market, with both the S&P 500 Index and the Nasdaq 100 Index climbing and then retreating to end the day lower. This dramatic reversal highlights that even a strong earnings report is no longer enough to support AI-related stocks’ lofty valuations. Concerns are now spreading from Nvidia to the entire AI ecosystem, including other semiconductor companies and tech giants like Microsoft and Meta, which have made massive investments. Their share prices have also come under significant pressure recently. “We saw a brief relief rally after earnings confirmed strong demand, but investors are now asking the next questions: What about power demand? Profit margins? What’s the return on investment (ROI)?” Natalie Hwang, Managing Partner at Apeira Capital Advisors, said, “As long as there are unresolved issues in the market, the relief rally won’t last.” Chill Spreads: AI Ecosystem Feels the Pressure Market anxiety is spreading throughout the AI ecosystem. An index tracking chip-related stocks dropped by 11% in November, heading for its worst month since 2022, with AMD and Arm both plunging over 20%. On the other end of AI spending, companies making massive investments are also under stock price pressure. Since its earnings report on October 29, Meta’s share price has fallen 21% as investors worry about its aggressive capital spending plans. Microsoft has also dropped 13% for similar reasons. Companies with weaker balance sheets have been hit even harder. CoreWeave’s stock plummeted over 40% this month, while Oracle fell 29%, potentially marking its biggest monthly drop since 2001. “For all the bubble doom-callers, they may be right about some companies like Oracle and CoreWeave being ‘too hasty,’ since both need to borrow heavily just to play in this game,” Kevin Cook added. Optimism vs. Skepticism: A Deep Wall Street Divide Currently, there is a clear split in opinions about the outlook for AI. Skeptics worry that investors have pushed valuations too high in pursuit of growth in a handful of AI stocks. They believe the hundreds of billions of dollars that tech companies are spending to remain competitive is unsustainable, especially as these firms start borrowing to keep up. Moreover, this cycle of financing could bring systemic risk—a weakness in one company might drag down the entire AI sector. Optimists, however, see the recent pullback as a healthy correction en route to further growth. They believe tech giants at the heart of AI trading—Microsoft, Amazon, Meta, and Alphabet—will continue investing to build out their businesses, with no signs of slowing in the short term. With strong industry demand and a relatively loose regulatory environment, they believe the AI investment cycle is just beginning. “There’s definitely a division,” said Dec Mullarkey, Managing Director at SLC Management. “We’ve had a long bull market, valuations are extended, so the fear of an AI bubble pop is strong. But another group of investors are looking for catalysts to extend the cycle—like a possible Fed rate cut, less regulation, more M&A and IPO activity.” Focus Shift: From Capital Spending to Return on Investment Nvidia’s results were indeed “exceptional.” According to Daniel Pilling, Portfolio Manager at Sands Capital Management, their forward revenue guidance was 5% higher than market consensus. However, it’s clear that investor attention has shifted. Investors are starting to question the other side of the spending—return on investment. Wall Street urgently wants to know when these massive sums will translate into faster growth and higher profitability for companies providing AI software and services. According to Mark Luschini, Chief Investment Strategist at Janney Montgomery Scott, the market needs clearer evidence of ROI for AI trading to regain momentum. “We may need another one or two quarters to see that evidence, but until then, this will remain the main concern for investors,” Luschini said. “As long as this issue continues to simmer beneath the surface, it threatens AI’s once bright outlook.” Data show that the four main clients accounting for over 40% of Nvidia’s sales—Microsoft, Amazon, Meta, and Alphabet—are expected to boost their combined capital expenditures by 34% to $440 billion over the next 12 months. Kevin Cook, Senior Strategist at Zacks Investment Research, believes that while Nvidia is “critical” to AI trading, its strong performance hasn’t dispelled doubts about these major buyers. A Bumpy Road Ahead: Volatility as the New Normal For now, whether investors see the glass as “half full” or “half empty,” they seem to agree on one point: the future of AI trading will be much bumpier. Art Hogan, Chief Market Strategist at B. Riley Wealth, points to macroeconomic uncertainty and disagreement over where we are in the AI revolution as key drivers of recent market volatility. He said, “I think all of this is part of the volatility we’re seeing.” As the market shifts from AI mania to a more rational examination, volatility could become the new normal in the AI sector. Risk Warning and Disclaimer The market has risks, and investment requires caution. This article does not constitute individual investment advice and does not take into account the specific investment objectives, financial circumstances, or needs of any particular user. Users should consider whether any opinions, viewpoints, or conclusions in this article are appropriate for their individual situation. Investing based on this information is at your own risk.