The blistering rally in AI took a breather this week, and that may be exactly what Wall Street needed.
The S&P 500 (^GSPC) snapped a nine-week win streak while the Nasdaq (^IXIC) declined from an all-time high. Investors rotated out of semiconductors, the hottest trade of the year. Instead, they bought more defensive plays like Health Care (XLV) and Financials (XLF).
“I think this is a healthy pause,” said Kelly Kowalski, head of Investment Strategy at MassMutual, pointing to Broadcom’s (AVGO) results, which sparked a broader semiconductor sell-off.
The custom chips giant’s stock tanked 12% the day after the company issued underwhelming third quarter AI chip guidance and left its full-year forecast unchanged.
“It wasn’t about any sort of fundamental change to the long-term AI thesis or anything sort of alarming from a big picture sense — it was more about very high expectations,” Kowalski said.
Steve Sosnick, chief strategist at Interactive Brokers, called Broadcom’s results “a bit of a splash of cold water” for the markets.
Strong results from cybersecurity firms Palo Alto Networks (PANW) and CrowdStrike (CRWD) also failed to impress investors.
“They’re not all going to be blockbusters. Maybe don’t chase them in advance, but after some of the big moves we had, nobody wanted to be left on the sidelines,” he added.
Investors had grown accustomed to outsized gains in AI-related stocks, including chip designer Marvell (MRVL), which Nvidia CEO Jensen Huang recently called the “next trillion-dollar company.”
They were also betting on a post-earnings surge similar to those seen in AI server makers Hewlett Packard Enterprise (HPE) and Dell Technologies (DELL) following their earnings reports.
“I would encourage people to stay more broadly diversified,” Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management Company, told Yahoo Finance last week.
Schutte advises considering a broader set of companies that may benefit from AI in both profitability and productivity.
“Make sure you [aren’t] speculating too much,” he said. ” This is a technology that I think we’re kind of in an air pocket right now.”
It’s too early to tell whether the AI trade has rolled over, but rising bond yields after Friday’s stronger-than-expected jobs report suggest investors expect the Federal Reserve to tilt toward a tightening bias to combat inflation.
“You never know if you’re past the peak until you’re actually past the peak,” Brian Jacobsen of Annex Wealth Management told Yahoo Finance on Friday.