Are technology stocks heading for a new cycle?
Christophe Pouchoy, Fund Manager for Echiquier Artificial Intelligence, La Financière de l’Echiquier (LFDE)
There has been significant profit-taking in tech stocks since mid-July 2024, mainly due to the sector’s strong outperformance over the past 18 months, driven by artificial intelligence (AI). This profit-taking makes sense and was to be expected. After a period of widespread enthusiasm, we believe investors will now focus more on the contribution of AI to companies’ earnings. With that in mind, identifying the best opportunities will require specialised expertise.
Paradigm shift
This situation is also the result of a macroeconomic paradigm shift. The market is shifting from a scenario of a soft landing to one of a more challenging environment and the potential risk of recession. If this is confirmed and investors consider reallocating their portfolios to other more defensive asset classes, such as bonds and/or money market instruments, while reducing their equity positions, we would expect to see profit-taking in stocks that have performed well, in this case the tech sector.
However, it would be simplistic to assume that tech stocks are only correlated to the macroeconomic cycle. Each tech sub-segment has its own cycle: automotive and industrial semiconductors are currently in the middle or the end of a bear cycle, the smartphone and computer markets are slowly picking up, and semi-datacenters are in the middle of a bullish cycle. These cycles are more closely correlated to inventory levels at end customers and in distribution chains.
While profit-taking in Nvidia, Broadcom and memory players may have spooked some investors, we believe the underlying trends remain strong and positive. Executives at AMD, Nvidia, Marvel and Broadcom have confirmed that strong customer demand should sustain their results for several quarters. Nvidia CEO Jensen Huang went so far as to cite “incredible” demand for the new generation of Blackwell AI chips, due to ship by the end of the year.
Hyperscalers, the major cloud service providers, have increased capital expenditure planned in 2025 by an average of 9%.[1] At the same time, Oracle’s CEO has been very optimistic about the number of data centres the company will be able to build, contrary to the fears of some investors who are anticipating a slowdown in demand for AI servers and a consequent slowdown in data centre construction. Finally, several software publishers and cloud infrastructure management service providers have highlighted the growing contribution of AI to their results. This sector should benefit from the second wave of AI monetisation, that of Edge AI.
Edge AI, the second wave
Edge AI will embed AI in real life, via nomadic technological equipment and connected objects in industry. This will accelerate the product renewal cycle, which will benefit tech equipment manufacturers. Beyond AI, innovation is set to continue in other tech segments including autonomous and electric cars, medical robotics and space technologies. We firmly believe that technological innovation is a long-term trend, which we believe offers exposure to growth and the world of tomorrow.