There have been many AI-driven sales in the three years since ChatGPT burst into public debate. However, nothing quite compares to the debacle that is sweeping the stock and credit markets this week.
On the one hand, there is the speed and amplitude of movement. In the span of two days, hundreds of billions of dollars evaporated from the value of stocks, bonds and loans from companies large and small across Silicon Valley. Software stocks were at the epicenter, with declines so steep that the value of companies tracked by an iShares ETF dropped by almost US$1 billion (million million) in the last seven days.
On the other hand, this punishment, unlike many previous ones, was not caused by fear of a bubble, but due to concerns that AI is about to supplant the business models of a wide range of companies that the most pessimistic have long pointed out as vulnerable.
“I don’t think it’s an overreaction,” he said. Michael O’Rourke, Chief Market Strategist at Jonestrading. “For two years we have talked about how AI is going to change the world and that it is a generational technology. In recent weeks we have seen signs of that in practice.”
The trigger was, apparently, innocuous: AI startup Anthropic PBC launched a new tool for legal tasks, such as contract review. On its own, the product is not seen as a game-changer, at least for now. But after a year in which Anthropic’s programming tools helped transform software development—as part of a broader wave of AI innovation—the four-paragraph launch announcement was taken extremely seriously.
“If today is legal technology, tomorrow it could be sales, marketing or finance,” he wrote Jackson Ader, KeyBanc analyst.
Adding to investor concern, even companies long considered the biggest beneficiaries of the AI boom are showing signs of fatigue. In its earnings report, Alphabet Inc. said capital spending on AI will be higher than anticipated, while Arm Holdings Plc issued a revenue forecast that missed expectations. Both stocks fell in after-hours trading.
“We started just selling software and now we are selling everything,” he said. Gil Luria, managing director at DA Davidson. “This feeds on itself: stocks fall enough to create negative momentum, and then others sell.”
Winners and losers
The debacle is not limited to companies listed in the US. London Stock Exchange Group Plc, Tata Consultancy Services Ltd. and Infosys Ltd. also tumbled this week on fears of AI displacement.
The decline also spread to those who have financed the sector on Wall Street, from banks to private equity firms, for whom software companies have been popular targets. More than $17.7 billion in loans to U.S. technology companies included in a Bloomberg index began trading at levels considered distressed in the last four weeks.
Losses deepened in Asia on Thursday, with a decline in South Korean memory chip maker Samsung Electronics Co. dragging down the world’s best stock index. Taiwan’s technology market also retreated, while Arm’s sales warning weighed on shares of its majority shareholder, SoftBank Group Corp., in Tokyo.
In many ways, anxiety remains hypothetical. Major software makers such as ServiceNow Inc. and Salesforce Inc., for example, have not missed earnings forecasts or told Wall Street that AI is causing them to lose customers.
Software companies have spent the last few years developing their own AI tools, typically promising the ability to use the technology securely by leveraging customer data already stored in their systems. Still, many providers have reported disappointing results so far. Microsoft Corp. said last week it had 15 million paid users of its Copilot tool, a tiny fraction of its base of hundreds of millions of users.
Recent developments raise the risk of AI leaders out-innovating established industry players, and the fear is that adjustment will come sooner rather than later.
“It’s going to be an interesting year,” he said. Dec Mullarkey, managing director of SLC Management. “What we’re seeing now is kind of the beginning stage of this reconfiguration of who the winners and losers are going to be, and who are the most vulnerable as we go through this process.”
