A new month, a new market wobble. Global stocks began September with their worst sell-off since the early August shocker. America’s technology-focused Nasdaq Composite index dropped by 3.3% on 3 September, with artificial intelligence (AI) flagship Nvidia suffering a 9.5% slide. The resulting $279 billion fall in value marks the biggest one-day decline in the market cap of a US stock in history.
While last month’s plunge began in Japan, this time concern is focused squarely on America. Weak manufacturing data revived fears that the US is on the brink of recession. Nervous markets have become prone to exaggerate “the likely scale of the impending US economic slowdown”, triggering overreactions to small bits of bad data, says Katie Martin in the Financial Times.
While overvalued “monster” tech stocks flail, the rest of the world’s top economy isn’t looking too bad. Société Générale analysts note that 80% of US stocks beat earnings-per-share expectations in the most recent quarter. Investors should shift their attention from the narrow AI “bubble” to opportunities across the rest of the market, especially in “small- and mid-cap stocks”.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
How are AI companies performing?
The Nvidia sell-off came even though the company delivered another set of “blowout results” last week, says Ipek Ozkardeskaya of Swissquote Bank. The AI-chip specialist topped sales forecasts by $2 billion for the fifth consecutive quarter, served up an unexpectedly robust forecast for the current quarter and announced a big stock buyback. It still wasn’t enough. The shares fell 14% over the next three days.
Investor “fatigue” with the AI story is evident. Nvidia’s shares have dropped a fifth since a mid-June peak, but have still risen more than 600% since the beginning of last year. “Nvidia is doing fine,” says Dan Gallagher in The Wall Street Journal. The other tech giants lavished $58.5 billion on AI capital spending in the second quarter – great news for Nvidia, which captures a lot of that money by selling its high-end chips to these firms for their AI projects. Projected revenue for the current quarter came in 2% ahead of Wall Street targets, but investors have become used to even bigger beats – in the same quarter last year, revenue outperformed expectations by 28%.
There are question marks about whether this earnings windfall will be sustainable if consumer demand for AI services fails to appear and tech firms rein in AI spending, but there is little reason to panic yet. Nvidia enjoys huge profit margins of more than 50%, five times the average for the S&P 500 as a whole, says John Authers on Bloomberg. Investors were disappointed by signs that rising margins won’t continue forever. Talk about a reality check.
The Nvidia share price is unlikely “to burst”, but “speculative froth” is being removed. Peter Atwater of Financial Insyghts notes that prices of the most “speculative” AI trades actually peaked in the spring and have since dropped a fifth. As Atwater puts it, the “peak in the AI frenzy is behind us. Unappreciated by the crowd, it occurred in late February. As they always do, the worst left the party first”.
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.
Read more
- Nvidia stock split: what it means for investors
- The AI boom is on borrowed time
- The technology and AI stocks to look out for in 2024
-
Top 10 areas with the biggest inheritance tax bills – is your town on the list?People in some of the wealthiest parts of London pay the most inheritance tax – but there are a few areas outside the capital where big bills are paid when a loved one dies
-
Inheritance tax reform ‘largely protects family farms’ – what are the alternatives?Independent analysis of the government’s inheritance tax reforms has found eight out of 10 farming estates will be able to pay their IHT bill without having to sell off parts of the farm
-
8 of the best properties for sale with shooting estatesThe best properties for sale with shooting estates – from an estate in a designated Dark Sky area in Ayrshire, Scotland, to a hunting estate in Tuscany with a wild boar, mouflon, deer and hare shoot
-
The most likely outcome of the AI boom is a big fallOpinion Like the dotcom boom of the late 1990s, AI is not paying off – despite huge investments being made in the hope of creating AI-based wealth
-
What we can learn from Britain’s "Dashing Dozen" stocksStocks that consistently outperform the market are clearly doing something right. What can we learn from the UK's top performers and which ones are still buys?
-
The rise of Robin Zeng: China’s billionaire battery kingRobin Zeng, a pioneer in EV batteries, is vying with Li Ka-shing for the title of Hong Kong’s richest person. He is typical of a new kind of tycoon in China
-
Europe’s forgotten equities offer value, growth and strong cash flowsOpinion Jonathon Regis, co-portfolio manager, Developed Markets UCITS Strategy, Lansdowne Partners, highlights forgotten equities he'd put his money in
-
How retail investors can gain exposure to Lloyd’s of LondonIt’s hard for retail investors to get in on the action at Lloyd’s of London. Here are some of the ways to gain exposure
-
The flaw in Terry Smith’s strategy at FundsmithOpinion Fundsmith has invested in some excellent companies, but it has struggled to decide when to sell, says Max King
-
The goal of business is not profit, but virtueOpinion Serve your customers well, and the profits will follow, according to a new book. It rarely works the other way around, says Stuart Watkins
