Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
AI stocks at risk as reality bites
Peter Garnry
Chief Investment Strategist
Summary: Stocks in our AI theme basket have been under pressure recently as the Q2 earnings season showed that revenue growth y/y continued to decline in Q2 from previous quarter with the AI hype failing to materialise in actual revenue growth rates. Microsoft's CFO said on the earnings call that AI sales will be gradual and not explosive. Nvidia is at the center of the AI hype and the chipmaker reports earnings next Wednesday and the key risk is that the recent growth is just a Chinese 'ketchup effect' rather something structurally high as revenue estimates suggest.
Key points in this equity note:
- AI-related companies have failed in the Q2 earnings season to live up to the hype set by social media and investors. Microsoft’s CFO says AI sales will be gradual.
- Revenue growth rate among the 20 companies in our AI theme basket has dropped to -0.6% y/y down from +10% y/y in Q1 as demand for technology products remains under pressure.
- Analysts are behind the curve on Nvidia as indicators are suggesting AI interest is falling. The key risk is that Nvidia’s growth is a Chinese ‘ketchup effect’ and not a sustained growth rate.
Q2 revenue growth fails to excite despite AI promises of growth
Our Artificial Intelligence (AI) theme basket, which consists of the 20 stocks we find to have responded most positively to the AI rally, has lately shown some cracks with especially Nvidia shares down 14% from its closing high back in July.
Six companies still miss reporting Q2 earnings, but the 14 companies in the AI theme basket has so far reported revenue growth figures that fail to live up to the AI hype. The average revenue growth rate y/y dropped to -0.6% from +10% y/y in Q1 2023 and down from +30% y/y in Q1 2022 before the technology slump started. AI has been hyped to a level of expectations that is simply too high for reality in the short run and there is a real risk that AI stocks will begin to undergo a cycle of downward revisions from analysts and investors.
Search engine data and traffic website date on ChatGPT already show declining interesting in AI, but the market has been slow to incorporate this information. Microsoft’s CFO also said during its earnings call on 25 July that AI sales would be gradual trying to realign investors’ expectations with the actual reality observed among Microsoft’s customers.
The six companies that are yet to report Q2 figures are (expected earnings date):
- Nvidia (23 August)
- Applied Materials (17 August)
- Snowflake (23 August)
- Marvell Technology (24 August)
- Pure Storage (30 August)
- UiPath(6 September)
Are analysts not paying attention in Nvidia?
Nvidia is at the center of the AI hype, but analysts were extremely slow to pay attention earlier this year despite indicators showing demand for chat bots such as ChatGPT was exploding. Revenue estimates for FY25 (ending January 2025) were sticky around the $36-37bn and it was not until Nvidia revealed its outlook for the fiscal year May that analysts paid attention to what was happening. At that point Nvidia shares were already up 109% year-to-date. Post the earnings result and the massive upward revision to revenue growth from Nvidia the share price took off combined with higher revenue estimates from analysts.
With data since June suggesting a significant cooling of interest in AI analysts keep revising their estimates for FY25 revenue now at $59.1bn which is more than a doubling from the FY23 revenue of $27bn. Once again, analysts seem quite slow in updating their estimates to reality.
As we flagged in equity note The Dangerous risk to Nvidia’s exuberant outlook it is quite clear that Nvidia’s growth bonanza is driven by Chinese internet companies playing catchup with Silicon Valley companies ordering massive amount of modified AI chips before the window potentially closes as Chinese companies fear that the Biden administration will prohibit sales of advanced AI chips to China. As we show in our analysis it is the Chinese geographical segment that is driving growth and not the US and this trend will be even more visible when Nvidia report FY24 Q2 (ending 31 July) figures on the 23 August. Because Chinese technology companies are scrambling to catch up with US technology companies there is a real risk that what the market thinks is a sustained high growth rate in AI technology is merely a short-term ‘ketchup effect’ led by Chinese companies. Interestingly enough, the FT recently carried the same message in their recent article China’s internet giants order $5bn of Nvidia chips to power AI ambitions.
In any case, we see accelerating weakness across the stocks in our AI basket and especially Nvidia is key to risk sentiment in AI-related stocks. Because of the significant gains this year in these stocks this group of stocks has a higher fragility because investors may rush for the exit to lock in quick gains made in just seven months if they smell the trend is over. As we have been arguing since June we recommend investors to lower their exposure to AI and semiconductor stocks as expectations have run too high.
Latest Market Insights
Quarterly Outlook
-
-
Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
-
Quarterly Outlook
Equity Outlook: Will lower rates lift all boats in equities?
Peter Garnry
Chief Investment Strategist
After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto... -
Quarterly Outlook
FX Outlook: USD in limbo amid political and policy jitters
Charu Chanana
Chief Investment Strategist
As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ... -
Quarterly Outlook
Commodity Outlook: Gold and silver continue to shine bright
Ole Hansen
Head of Commodity Strategy
-
Quarterly Outlook
FX: Risk-on currencies to surge against havens
Charu Chanana
Chief Investment Strategist
Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo... -
Quarterly Outlook
Equities: Are we blowing bubbles again
Peter Garnry
Chief Investment Strategist
Explore key trends and opportunities in European equities and electrification theme as market dynami... -
Quarterly Outlook
Macro: Sandcastle economics
Peter Garnry
Chief Investment Strategist
Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p... -
Quarterly Outlook
Bonds: What to do until inflation stabilises
Althea Spinozzi
Head of Fixed Income Strategy
Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ... -
Quarterly Outlook
Commodities: Energy and grains in focus as metals pause
Ole Hansen
Head of Commodity Strategy
Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
Disclaimer