The AI paradox: record results, falling stocks
Why did some AI shares dip?
Broadcom (a U.S. semiconductor tech firm) did almost everything right. Revenue hit a record $22.2 billion, up 48%, and AI chip revenue more than doubled to $10.8 billion. Management called demand insatiable and predicted that future revenue would be even higher. The stock still fell by more than 15% on Thursday.
Nothing in the earnings report was bad. The problem was the set-up. Shares had run to record highs going in, AI expectations landed below the most optimistic estimates, and the company’s long-term target stayed put. After such a great run, very good results are seen as a letdown. It was the same story with Crowdstrike (an AI cybersecurity company); its stock fell, despite beating expectations and seeing its shares jump in recent months. Its stock did bounce back somewhat, however.
The fundamentals across AI are still strong; the expectations attached to them are stronger. When a stock is priced for a blowout, beating expectations is not enough.
How are companies paying for AI?
After Alphabet (Google’s parent company) announced plans to raise $80 billion from stock sales to fund data centres, its share price swiftly fell by about 4%. For two years, the market has been happy with the AI capital expenditure story, reading heavy spending as ambition. Selling that much stock to pay for it sends a different message, however. It puts dilution on the table and shifts the debate from how much they spend on AI to how they finance it, as well as how long investors have to wait for returns. The market is asking harder questions about the bill, and that has showed up in its reaction. But still, if you zoom out, the returns have still been absolutely incredible so far this year.
What impact did oil prices have on the markets?
For months, markets treated the Iran conflict as background noise. This week changed that a little. After the U.S. struck sites in Iran, and Iran fired missiles at Kuwait, oil rose and equities flinched. The S&P 500 Index snapped a nine-session winning streak, and the S&P/TSX Index shed nearly 370 points on Wednesday, after hitting a record high the day before.
Higher oil prices fed into bonds, pushing the 10-year yield toward 4.5% and the 30-year yield near 5% again; increasing rates put pressure on the expensive tech that has been leading the equities rally. By Thursday, a ceasefire pulled oil and yields back down, and started a rotation toward banks and retail stocks. Time will tell if this situation holds.
For Canada, higher oil supports the energy names on the Toronto Stock Exchange, but it also feeds inflation and puts pressure on the Bank of Canada, which now faces strong inflation and a technical recession. A very difficult spot.
What will jobs data and interest rate decisions tell us?
Next week brings two tests. Friday's U.S. jobs report should show about 85,000 new jobs for May, down from April. The Bank of Canada will make its interest rate decision on June 10, leaning toward a hold but watching every oil price movement. After a week where good news got punished and an old risk made more of an impact, the question is simple: with expectations this high, what counts as a positive surprise now?
Listen to the latest podcast from the IG Investment Strategy Team for further insights.
