The tech slide is driven by agitated investors
The worst day in the markets in two years? Japan in freefall? A tech collapse to rival the 2001 dotcom bust? Not really. What is true is that Friday and Monday saw major drops in share indices: the broad US market plunged 3% on Monday, while the tech-heavy Nasdaq dropped 3.5%. Japan’s Nikkei had its worst ever single day, closing some 12% down, though it has since recovered by some 9%, while Europe’s Stoxx 600 index dropped 6%.
Japan’s calamitous dip aside, most of this could be dismissed as simply another day in the markets were it not for one thing: leading the decline was Big Tech, which has hitherto been investors’ saviour.
Apple, Microsoft, Google owner Alphabet, Amazon, AMD, Nvidia, Microsoft and Meta Platforms all dropped, between just under 5% and almost 15% in the case of Nvidia.
The worst news came from Intel, which revealed a decline in revenue of $12.8 billion (approx. €11.7 billion).
The case of Intel is somewhat sui generis, though. Unlike Google, Apple, Nvidia and the rest, Intel’s share price has not merely corrected but crashed, falling almost 26% in a single day following an earnings call with chief executive Pat Gelsinger during which it was revealed that the company is responding to the losses by ditching some 15% of its global workforce. It would be premature to say Intel is doomed, but such a drastic cut in headcount and its share price now languishing at the same level it was at in 1997 cannot be waved away.
However, the broad market decline, while it has hit tech hardest, was driven by macroeconomic factors. Principally, the problems were a weaker than expected US jobs report, which showed unemployment had risen to 4.3%, and the fact that the Federal Reserve, which acts as the central bank for the US, failed to lower interest rates.
In other words, investors are afraid of a recession. Growing unemployment and high interest rates, which have risen in order to combat inflation, are both signs that spending could slow, resulting in lower revenue and profits. In addition, high interest rates drive money out of shares, which are inherently risky, and into risk-free government bonds.
That said, there are some specific concerns around tech.
Most of the tech giants were on shaky footing after publishing decidedly mixed second-quarter results over the past two weeks, while Apple in particular is suffering from Warren Buffett’s decision to cut Berkshire Hathaway’s massive stake in Apple by half.
However, there is a broader picture in the sector: having spent 2022 in the doldrums, tech share prices rocketed. Such was the 2023-2024 tech boom that the price rises by the multinationals caused the main US index, the S&P 500, to rise by some 37% despite most of the 500 companies in the index seeing no price growth at all.
In other words, tech has been in a bubble.
That does not mean that a 2001-style collapse is imminent, or even likely, though. Despite most of Big Tech posting weak-ish quarterly results, and despite very real fears of US recession, the sector remains extremely profitable, which is something that could not be said about the hapless Pets.com in 2001.
There is one fly in the ointment, however: artificial intelligence (AI).
Since OpenAI wowed the world in November 2022 when it unleashed ChatGPT 3.5 on the world an estimated $1 trillion (approx. €916.5 billion) has been ploughed into AI, notably into data centres and, of course, on silicon.
So far investors have been pleased: companies with significant interests in AI, whether in infrastructure and software such as Microsoft, Meta and Google, or hardware in the cases of Nvidia and Broadcom, have seen their share prices rocket.
But share prices are predictions: they rise as a result of expectations of increased earnings. As a result, massive growth will be required to turn that trillion dollars into several trillion in profits. In recent months, however, scepticism has been growing: researchers have warned that the widespread belief that generative AI will lead to machines that can actually think (known as artificial general intelligence or AGI) is a fantasy, while investment banks are among those saying the money spent may never be recouped.
Whether or not the market bloodbath continues this week, at some point investors are going to need to see returns on AI spending – or else they will flee.
Subscribers 0
Fans 0
Followers 0
Followers