All eyes will be on chipmaker Nvidia next week as it is set to release its latest quarterly earnings. It is seen as the poster child for the artificial intelligence (AI) revolution, with its chips sitting at the heart of the latest technological innovation.
But there are real concerns that the ‘Magnificent Seven’ (Alphabet, Apple, Microsoft, Tesla, Nvidia, Meta and Amazon) are in for quite the fall from grace, with the US market dropping this week.
Nervy investors have already started to sell down the US tech giants, after a report by Massachusetts Institute of Technology (MIT) researchers found that most AI investments will never make a return for businesses.
Only 5% of AI pilots make money, with the remainder “stuck”, with no measurable impact to profits, the report found. Meanwhile, some 50% of AI projects failed, they said.
The technology titans have piled billions of dollars into research and development into AI, hoping to be the face of the next market revolution.
The S&P 500 is down 1.1% this week, with Nvidia dropping 3.2%. While this may not seem drastic, it means some $1trn has been wiped off the value of tech giants since Monday.
Ed Monk, associate director at Fidelity International, said there is little doubt that AI will revolutionise how we live, but the pace of this change can take time.
He described the falls this week as a “stumble” for the US tech giants, but noted that previously they had made “huge gains”. The issue is that their impressive run has left many on high valuations, meaning “any bad news is likely to lead to volatility”.
Nvidia is an example of this: although the chipmaker has consistently beaten estimates, it has been priced for perfection. Shares are now on a price-to-earnings (P/E) ratio of more than 50x, meaning any hint of weakness next week could send the price into freefall.
“A longer-term headwind for AI companies may be inflation and interest rates,” said Monk, as the strongly growing profits these companies have produced mean that earnings are predicted to happen years into the future.
“As such, they stand to be eroded by any uptick in inflation and rates, which reduces their value in real terms,” he added.
So should you sell now, before the bubble implodes?
This is the age-old question. There have been many who have suggested selling out over the past few years (particularly in 2022 when the tech giants looked under serious pressure from rising interest rates). Yet the rich keep getting richer, as it were, with the tech titans climbing to new heights seemingly every year.
In my ISA portfolio, Rathbone Global Opportunities is my largest holding. FE fundinfo Alpha Manager James Thomson includes Nvidia (4%, the fund’s largest holding), Microsoft (3%) and Alphabet (2.5%) among the top 10 largest positions.
Yet with 51 names in the portfolio and no big positions in the other tech giants, the fund should be better at defending capital in a period when the tech giants fall.
Even so, it has crossed my mind as to whether now is the time to sell it and move to something else.
My only other consideration is my other holdings: I also own an Asia fund and a UK smaller companies portfolio. This diversification means I can afford to take the lumps with the tech giants through the Rathbone fund.
My children are invested in a stock market tracker, which is far more dangerously exposed to the tech names, but they have some 13 and 16 years before their junior ISA will become available to them, and another two after that before they can access the money.
I hope that, if this is a bubble, it will be a distant memory by then.
So for now I am standing pat. But if I were more concentrated into the tech names, I would be taking profits, selling down and reallocating somewhere else.