It’s that time of year again. Another earnings season is upon us, with companies such as Taiwan Semiconductor Manufacturing, ASML, and Intel among the first to report. These players all offered the same message: Demand for artificial intelligence (AI) chips is soaring. And in each case, this is translating into revenue growth.
This message isn’t new, as demand has been climbing quarter after quarter — and yet, in the late part of last year and the first quarter of this year, AI stocks tumbled. These players, ones that actually drove the S&P 500 through the first three years of a bull market and helped the index post a 78% gain over the past three calendar years, rather suddenly fell out of favor. Investors turned away from them and rotated into completely different sectors, from consumer-related stocks to healthcare shares.
Recently, AI stocks have regained positive momentum, but the big question in investors’ minds is: Will this last? My prediction is that AI stocks will keep this going, soaring during and after this earnings season. Here’s why.
Investors have wondered whether a recent rebound in AI stocks will last.
It’s that time of year again. Another earnings season is upon us, with companies such as Taiwan Semiconductor Manufacturing, ASML, and Intel among the first to report. These players all offered the same message: Demand for artificial intelligence (AI) chips is soaring. And in each case, this is translating into revenue growth.
This message isn’t new, as demand has been climbing quarter after quarter — and yet, in the late part of last year and the first quarter of this year, AI stocks tumbled. These players, ones that actually drove the S&P 500 through the first three years of a bull market and helped the index post a 78% gain over the past three calendar years, rather suddenly fell out of favor. Investors turned away from them and rotated into completely different sectors, from consumer-related stocks to healthcare shares.
Recently, AI stocks have regained positive momentum, but the big question in investors’ minds is: Will this last? My prediction is that AI stocks will keep this going, soaring during and after this earnings season. Here’s why.
Image source: Getty Images.
AI stock valuations
So, first, let’s consider why investors lost their appetite for AI stocks in recent months. A few elements contributed to this. AI stocks, after years of gains, in many cases had reached high valuations — for example, top chip designer Nvidia peaked at about 50x forward earnings estimates. And AI software company Palantir Technologies reached a mind-boggling 285x forward earnings estimates.
Palantir Technologies
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This prompted investors to worry about the potential formation of an AI bubble. At the same time, tech giants continued to pour investment into AI infrastructure, raising spending forecasts well into the billions of dollars. And the following risk emerged: What happens if the AI revenue opportunity isn’t as vast as expected?
Meanwhile, growing conflict in Iran that turned into war sparked worries about the general market and economic environment — uncertain environments push investors toward “safer” bets, and we saw this shift in the sector rotation I mentioned above.
All of this meant that even positive earnings reports from AI companies weren’t enough to push AI shares higher.
So, what has changed, and why do I think AI stocks now will climb? First, the general geopolitical environment has improved, with Iran and the U.S. progressing toward negotiations. The current ceasefire suggests that both parties are interested in reaching an agreement. Investors don’t like major uncertainties, as they can lead to many headwinds for companies. So when uncertainty lifts, investors are more likely to invest in assets that depend on the economy, like growth stocks.
Questions about AI demand
At the same time, evidence of ongoing demand for AI continues to pile up — and this brings me back to the subject of earnings season. Investors in past months questioned whether AI demand would continue — even as companies talked about strong demand. It’s logical that they would doubt the longevity of such a movement, as the pace of growth has been incredible.
But at a certain point, as a trend marches on and is observed by the industry’s major players, and as the new technology is actually applied to real-world problems, it becomes clear that the growth story is real and has what it takes to last.
We may have reached this point right now. A couple of clues: Amazon, in a letter to shareholders earlier this month, mentioned that as companies expand their use of AI, they’re increasingly signing up for additional cloud services. So AI could result in a broad growth opportunity for many AI players, such as cloud service providers. Amazon added that its chips business is “on fire,” another clearly positive message. And TSMC, to kick off the current earnings season, said its customers’ customers — those serving companies using AI — are seeing strong chip demand.
All of this sets the stage for additional positive earnings reports and messages from those selling AI products and services. And this time around, considering the points I made above, my prediction is AI stocks will go on to soar — during earnings season and beyond.
