The repricing of risk around a highly leveraged element of the artificial intelligence ecosystem—the neocloud companies—has caused investors to rethink the earnings potential of AI and its accumulation of debt.
The Philadelphia Semiconductor Index tells the story.
After doubling in value from March to June, the SOX semiconductor index, which covers 30 semiconductor and related equipment companies—has given back a quarter of its gains, much of it recently.
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In the week ending Oct. 9, the SOX dropped by 564 points, losing 4% of its value. That decline was followed by a drop of 1,435 points, representing 11% of its value, in the week ending Oct. 16.
By any measure, these were uncommon events, with a 2.7 standard deviation loss in the first week of October followed by a 6.7 standard deviation loss in the second week.
While our view remains that building an AI infrastructure is in the best interest of the American economy, the troubles at the neocloud company CoreWeave is a reminder of the perils of booms and busts.
Whenever a transformative technology is introduced, there will be malinvestment, malfeasance and firms that fail. Eventually, the bond market imposes market discipline.
This time is not different.
During the railroad boom following the Civil War and the late 1990’s dot.com financial bubble, infrastructure was built that was not used until well after the booms that went bust.
Today’s AI build-out is similar, which is why a bullish outlook—as opposed to what in my view is an incorrect dystopian outlook that has gained favor—needs to prevail.
One should be realistic about our own economic history, the challenges of the current moment and the ups and downs of classic booms and busts.
