Has the AI Boom Reached Its Ceiling?

Boom or Bust?

The AI boom has been driving the stock market higher for months. But is the trend showing signs of slowing?

The final week of July was volatile for semiconductor stocks like NVIDIA (NVDA), Qualcomm (QCOM), and Arm Holdings (ARM). These companies build the computer chips used to power AI data centers. Their share prices have surged since the start of the year, but declined sharply last week following earnings reports from tech giants like Alphabet (GOOGL) and Microsoft (MSFT) that have invested heavily in the technology.

This raises the question: Will AI continue fueling the market, or has the hype hit its ceiling?

Hype and Headwinds

The average share price of companies in the AI supply chain has risen by more than 100% since the beginning of last year, compared to just over 40% for the S&P 500, according to a report by The Economist. And let’s be clear, in spite of the recent turbulence in the sector, chip maker shares are still well in the green this year.

Companies won’t plan to stop investing in AI anytime soon either. Between 2023 and 2027, businesses will pour an estimated $1.4 trillion into data center development, per New Street Research data cited by The Economist. More than $100 billion of that trillion-dollar investment could come from just four firms: Alphabet, Amazon (AMZN), Meta (META), and Microsoft.

However, these same companies are facing headwinds related to their AI businesses. Tech giants have attracted the attention of the Federal Trade Commission (FTC), which is working to determine whether AI partnerships by Alphabet, Amazon, and Microsoft are really just mergers intended to avoid antitrust laws. And the Department of Justice is investigating NVIDIA for potentially using anticompetitive sales practices, per a report by The Information.

Links in the Chain

Market concentration in the AI supply chain that means trouble for one company could spell trouble for others. With AI being a theme running through this year’s market run, trouble could spread if investors lose confidence that the theme will stand the test of time at the current levels.

But ultimately the biggest concern may be demand: Will companies’ staggering investments continue to yield new innovations, and efficiencies, keeping consumers and shareholders satisfied? Only time will tell.

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