IBM becomes the latest victim of the AI scare trade

US stocks got the Monday blues again, perm any one of several reasons. Fears over AI spending were reignited after Mike Burry, famous for his 2008 call on the US property market, returned to focus on big tech spending. Mr Burry expressed the view that companies such as Amazon, Meta, Microsoft and Alphabet are burning through cash flow on AI data centres, using accounting tricks to mask the damage to current earnings. Activist investor Boaz Weinstein added his concerns on private credit at a speech in Miami, saying the turmoil surrounding Blue Owl Capital’s funds is exposing deeper cracks in the $1.8 trillion industry. As we know, Jamie Dimon also reiterated his concerns that some investment banks are being irrational in their lending.

The demand for what AI will provide is almost insatiable at present; these majors are possibly caught between a rock and a hard place. Don’t invest, get left behind, do invest, and fears grow on the potential risks.

Reason number two is the whole tariff mess caused by the Supreme Court ruling. Trump will not back down; companies are unlikely to get their money back. The ruling reignited fears that China will retaliate after US President Donald Trump signalled new investigations targeting some of his old favourites, including electric vehicle batteries, rare earths, and advanced artificial intelligence chips.

Software stocks, already on their knees, took another beating on Monday as investors continued to worry about the impact AI will have on these industries, with IBM falling 13% as it became the latest company to suffer from the AI scare trade. The rotation away from those companies whose business model may suffer from the AI revolution to those that cannot be disrupted, consumer staples as an example or those that are supposed to benefit, chipmakers obviously will have made or broken a portfolio in the past months. This broadening of market sectors’ performance has led the equal-weighted S&P 500 to reach record highs at one point last week.  As we have pointed out before, the sea may look calm on the surface, but beneath that calm, there is an undercurrent that can drag you in many directions. These times bring opportunities.

Donald Trump delivered his State of the Union address last night, which was all a bit of a non-event, as he spoke for almost 2 hours. He described inflation as plummeting, which yesterday’s consumer report would not completely agree with. Consumer confidence came in ahead of expectations, but inflation remains a concern for consumers. He also had a dig at those judges who ruled against him on tariffs and reiterated his warnings to Iran on its nuclear program.

NVIDIA’s earnings are out later today, and its market cap now accounts for 8% of the S&P 500.