There has been a great deal of discussion about whether the stock market will eventually start to sell off the Magnificent Seven. In June, as a group, their market cap dropped $2.3 trillion. Of course, the drop is uneven, but given how important they are to the market’s incredibly long rally, it is a warning sign.
Where are the investors going? Mostly to the super-hot chip market. The FT points out that the Philadelphia Semiconductor Index is up 93% this year. The lead stocks in the index are Nvidia (NASDAQ: NVDA | NVDA Price Prediction), Intel (NASDAQ: INTC), AMD (NASDAQ: AMD), Broadcom, Taiwan Semiconductor Manufacturing, and Micron Technology. In all, the Philadelphia Semiconductor Index contains 30 stocks.
The theory behind the rotation into “chip” stocks and AI data infrastructure stocks is that demand has risen sharply because AI-heavy companies like Alphabet, Microsoft, and OpenAI will invest well over $1 trillion in these data centers over the next two to three years.
The rotation poses a huge risk, given that AI data centers are being blocked by residents in communities where they may be built. This has moved beyond residents to elected officials at the town, city, state, and even federal levels. The opposition is based on a massive need for electricity, which can rapidly drive up residential rates. And, a very large data center can use five million gallons of water every day.
There is also a great deal of evidence that businesses are not getting a good return on the investments they are making in AI. While they believe that, in many cases, AI improves productivity, it does not increase profits and, because of its cost, it may erode bottom lines.
After a huge surge in value, the early darlings of the AI industry have faltered. Microsoft’s (NASDAQ: MSFT) price is down 23% this year. Its relationship with OpenAI made it an industry leader until the partnership fell apart. Its investments in AI, which have moved into the hundreds of billions of dollars, are deemed too high.
Too high. That may be where the chip business is headed. The drive toward AI growth is costing massive amounts of money. If that drive upward slows, the need for chips will shrink quickly.
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