Investors are adapting as the hottest trade of the past year shows signs of slowing down

The Market Rally in Artificial Intelligence: Signs of Weakness?

The market rally driven by artificial intelligence is starting to show signs of weakness, but investors remain largely unconcerned. Stocks have surged to record highs this year in part due to the potential of AI, with enthusiasm benefiting a handful of hardware names. Nvidia, a key player in the AI trade, has seen an 80% increase in its stock price this year. Semiconductors as a whole have been leading the market, and crypto stocks have risen with higher bitcoin prices. However, the advance of these groups may be starting to falter.

On Tuesday, Super Micro Computer, a major AI player, saw a drop in its stock price after announcing a new share offering, indicating that the company is taking advantage of its elevated share price. Nvidia has experienced volatility this week, with some investors opting to book profits. Bitcoin proxy MicroStrategy also saw a 13% drop in its stock price this week as the price of bitcoin pulled back from all-time highs.

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These signals have raised concerns among some investors that the AI rally could be on the verge of unwinding, despite the long-term bullish outlook. Some are suggesting that it may be time for investors to secure their gains and seek out new market leaders.

Josh Brown of Ritholtz Wealth Management expressed his concerns about the tech trade, particularly the dominance of mega-cap technology stocks. He noted the unprecedented disparities between the performance of the largest technology stocks and the rest of the market, suggesting that a correction may be imminent.

Despite these concerns, tech stocks surged after the Federal Reserve announced it would keep interest rates unchanged and maintain an outlook for three rate cuts this year. This provided relief to investors who had feared a more hawkish stance from the central bank.

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Investors who believe the AI trade still has room to grow point to the strong fundamentals of tech companies, contrasting them with the overvalued internet companies of the dot-com bubble era. However, even these profitable fundamentals are beginning to show signs of weakening.

Ryan Grabinski of Strategas Securities noted that net income for nine of the top 15 AI stocks is expected to slow in 2025 compared to 2024. While some believe that the fundamentals could still support further growth, others are cautioning against excessive optimism.

As signs of weakness in the AI trade become more apparent, investors are advised to consider shifting to other sectors of the market, such as real estate, utilities, and energy. Some suggest looking at undervalued companies or second-derivative plays of the AI trade as potential opportunities.

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While concerns about the AI trade persist, many investors remain optimistic about its long-term prospects. As opportunities continue to emerge and new market leaders potentially emerge, the AI trade may evolve in unexpected ways. The unveiling of cutting-edge technology like Nvidia’s latest generation of chips only adds to the enthusiasm for the future of AI.

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