AI stocks bounce back — with one notable exception
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The AI trade has regained momentum despite — or maybe because of — Nvidia's struggles following the weekend revelations from CEO Jensen Huang.
The big picture: Monday's sudden burst of exuberance for AI was the latest wide swing for a market upended by last week's "blue tsunami" in the midterm elections and the threat they could pose to the data center boom.
By the numbers: The Nasdaq 100 index of large-cap technology shares soared 3.4%, its biggest daily jump since late March and its second-best showing of the year.
Zoom in: Stocks romped across the AI ecosystem — well, with one important exception.
- Pick-and-shovel plays such as engineering and construction companies, and makers of data center inputs like fiberoptic cables, servers and data storage devices soared.
- The companies that build and lease out data center computing power, known as neoclouds, also jumped. (Those companies had been at the epicenter of recent jitters about financing for the AI boom.)
- Hyperscalers rose, paced by Meta, which notched a gain of 5.1%.
- Semiconductors roared, with the SOX index posting its best gain — 6.9% — since late July.
Yes, but: The glaring exception to the AI-palooza was its best-known player, Nvidia.
- Weekend revelations from CEO Jensen Huang — who acknowledged having an affair with a woman suspected of connections to Chinese intelligence — left investors grappling with uncertainty about the CEO's future.
The intrigue: Some investors may see Nvidia's pain as potential gain for rivals.
- Broadcom jumped 8.8%, its best day in nearly a year.
- Advanced Micro Devices soared 13.3%, benefiting also from an upgrade to "Outperform" — effectively, a "buy" recommendation — from Oppenheimer analysts on Sunday.
Context: Bullish commentary from Wall Street established the background music for Monday's big bounce, as analysts urged investors to buy into the market's recent soft patch.
- "We believe stocks are now clearly in oversold territory," Goldman Sachs analysts wrote in a note Monday.
- "We believe the market's reaction to the midterms is overdone," wrote Morgan Stanley tech analysts in a note entitled "Buy the Drop: AI Investment Opportunities Post the U.S. Midterms," which it published Sunday night.
- "We do not think AI is a continued sell here. In fact, tech drawdown is offering certain opportunities. The selloff was very sharp," JPMorgan equity strategists wrote Monday.
These analysts could be right. The recent slump has been deep in certain sectors such as chips.
- And buying the dip has been a solid strategy in recent years, especially for retail investors.
The other side: On the other hand, there may be good reasons such stocks sold off.
- For example, even before the news about the Nvidia CEO or the anti-data center vote at the polls, Wall Street expectations for capital expenditures from hyperscalers had been looking a bit flat.
- Given that a large percentage of that AI investment is spent on the semiconductors needed to make these computing centers, well, compute, that would seem to be important for tech investors.
What's next: Will the stock market's rally be the start of a new phase of AI exuberance?
- Or is it just an example of Wall Street's proverbial dead cat bounce?
