US tech earnings to test AI investment cycle amid 'AI fatigue' debate: Jefferies
New Delhi, July 10
The upcoming quarterly earnings of major US technology companies will be the next key test for the artificial intelligence investment cycle, even as investors debate whether the market is witnessing "AI fatigue" and shifting towards cheaper markets such as India and China, according to a Jefferies report.
The report, titled "AI fatigue and rotation", said, "The new quarter has begun with much talk of 'AI fatigue' as investors look out for a peaking out of momentum and rotation into cheaper 'value' names which have not been part of the AI trade." It added that Tencent is one example of this trend in Asia.
Jefferies said the recent correction in AI-related stocks does not signal the end of the AI investment cycle. "Such corrections are both natural and healthy. But so long as the AI capex arms race continues the beneficiaries will remain the picks and shovels trade," the report said, referring to companies supplying AI infrastructure.
The report said investors are now focused on the quarterly results of four major US hyperscalers - Alphabet, Amazon, Meta and Microsoft - to assess whether AI spending remains on track and if these investments are starting to generate returns.
"This is why the next quarterly earnings announcements for the hyperscalers due to commence on 22 July will provide the next stress test for the AI story in general," the report said.
According to Jefferies, the key concern has shifted from the scale of AI investments to whether hyperscalers will be able to monetise them. It said uncertainty over returns is influencing investor sentiment, with markets also debating whether the recent decline in memory chip stocks signals a broader rotation or possible cuts in AI capital expenditure by hyperscalers.
The report also noted that large US technology companies have underperformed the broader market in recent months, while concerns over AI monetisation are increasing.
Jefferies said a shift away from expensive AI-linked stocks could benefit markets outside the AI trade, including China and India, as investors look for value opportunities.
— ANI
Reader Comments
AI fatigue is real. The hype around generative AI has been overblown for months. Companies need to show actual revenue from these massive investments, not just promises.
Jefferies has a point - the 'picks and shovels' approach makes sense. Indian IT firms like Infosys and TCS that provide AI infrastructure services could be the real winners here. 🎯
The hype cycle is definitely cooling off. Remember when everyone was dumping money into crypto? Same pattern emerging with AI. Fundamentals matter more than buzzwords.
As an investor in Indian markets, I welcome this rotation! Our valuation is reasonable compared to US tech stocks. But we need to be careful - if AI spending slows globally, it could impact our IT export sector too. It's a double-edged sword. ⚔️
The real test will be the hyperscaler earnings later this month. If Microsoft and Meta show weak AI monetization, we could see a significant correction across global tech markets.
The Jefferies report makes a valid point about rotation into cheaper markets. But let's not forget - India's digital transformation story is far from over. AI adoption here is still in early stages, and our startups are innovating with smaller budgets. We
We welcome thoughtful discussions from our readers. Please keep comments respectful and on-topic.