The artificial intelligence trade led by Nvidia (NVDA) saw a rebound in sentiment early this week after a brief setback. However, market sentiment came under pressure again on Tuesday following news that SoftBank Group had liquidated its Nvidia holdings and that AI cloud services provider CoreWeave (CRWV) had lowered its revenue guidance due to slower data center construction progress. On Tuesday Eastern Time, AI-related stocks, represented by Nvidia, collectively declined due to concerns over overvaluation, with the Nasdaq Index closing down 0.25% at 23,468.30 points.
Amid market fluctuations, investors face a dilemma: they worry about missing out on the dividends of AI development while remaining vigilant about a repeat of the dot-com bubble. Recently, Wells Fargo Investment Institute downgraded the S&P 500 Information Technology sector from “Favorable” to “Neutral,” citing overvaluation as the core reason. This sector includes AI leaders such as Nvidia, Microsoft, and Broadcom. Global Investment Strategist Douglas Beath pointed out that from April 4, when the rating was upgraded, to October 24, the information technology sector accumulated a 60% gain, significantly outperforming the broader market. Although AI technology is driving revenue growth, with manageable debt levels and strong cash flow, the surge in valuations has made the sector more sensitive to negative news. Beath emphasized that international trade tensions and concerns about returns on capital could amplify volatility and recommended that investors reduce their allocation to market weight to lock in gains.
While reducing holdings in technology stocks, Wells Fargo advises shifting funds to three sectors: industrials, utilities, and financials. Beath analyzed that industrials and utilities not only have lower valuations than technology stocks but can also indirectly participate in AI development through trends in data center construction. Financial stocks, on the other hand, stand to benefit from a steeper yield curve and an improving regulatory environment, while supporting the AI industry through financing for mergers and acquisitions. Additionally, their current valuations are at a discount compared to the S&P 500 index.
In addition to institutional repositioning, SoftBank’s liquidation of its Nvidia holdings, cashing out $5.8 billion, has heightened market concerns that the AI boom may have peaked. Michael Burry, the renowned investor who accurately predicted the subprime mortgage crisis, also pointed out that some technology companies might be using accounting methods to inflate AI-related profits. These signals, resonating with CoreWeave’s lowered performance guidance, collectively amplified selling pressure on AI-related stocks, highlighting the market’s growing vigilance against valuation bubbles.
