Since at least the summer of last year, a large part of the financial commentariat has been waiting for the bubble in US AI stocks to burst.
Instead, something stranger is unfolding. In recent weeks, some leading technology names have suffered heavy sell-offs (Microsoft and Amazon are both off 17% since late January).
Yet AI continues to make progress.
Try 6 free issues of MoneyWeek today
Get unparalleled financial insight, analysis and expert opinion you can profit from.
Start your trial
Sign up for MoneyWeek’s free twice-daily newsletter.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Investors are beginning to seriously consider the implications of a world disrupted by the technology. Their conclusion? Today’s winners might become tomorrow’s laggards.
Latest Videos FromMoneyWeek
Software firms – first victims of the AI apocalypse
Those seeking to understand the success of US tech over the past 15 years need only consider the economics of software.
While developing a software product can be expensive, the marginal cost of shipping extra units is virtually zero. This makes software as a service (SaaS) ludicrously profitable.
Last year, Microsoft boasted gross margins of 68%. For comparison, supermarket Tesco’s gross margin is about 7%.
In 2011, venture capitalist Marc Andreessen declared that “software is eating the world”. Now AI is threatening to eat software.
On 5 February, start-up Anthropic launched the latest edition of its Claude Opus chatbot.
Highly capable at coding, it had been used to create a professional platform that performs basic legal analysis.
The implication is clear. If AI tools allow companies to create their own enterprise software in-house, why would they need to keep paying top dollar for a team of Silicon Valley software engineers to do it for them?
A major sell-off followed – dubbed the “Saaspocalypse”. The S&P North American Technology Software index has lost 30% of its value since the start of October.
Amplified by debt concerns, the world’s most profitable business model suddenly looks like one of the riskiest.
London’s small club of data-led firms wasn’t spared.
Everything from logistics to wealth management sold off as investors searched for new AI victims.
Yet despite the rout, the wider US market is flat for the year. Why? First, not all tech is in the doghouse.
Google is thought to have an AI edge because of all its data.
Hardware suppliers such as SanDisk and Western Digital remain in hot demand.
Second, some old-economy stocks are enjoying a lift.
Energy and commodity firms stand to gain from the data-centre build-out.
Industrials might be better positioned to pocket the gains of AI than the tech firms themselves.
Supported by the tailwind of an ageing population, healthcare is growing at a solid clip. If the rotation trend holds, then the FTSE, which is infamous for its “dinosaurs”, might just be set for a revival.
Yet uncertainty is rife. It will be a long time before we get a clear idea of the real winners and losers from AI disruption, says Jim Reid of Deutsche Bank. “That leaves plenty of room for investors’ imaginations… to run wild.”
Expect a volatile year with lots of “big sentiment swings” ahead. As for investors, remember that, “as with all disruption, opportunities will abound”.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
