Global investors are bracing for a battle between long and short-term wins amid a dramatic sell-off in artificial intelligence-related stocks.
AI darling Nvidia buoyed an otherwise deflated market when it reported strong earnings after the bell on Wednesday, sending its own stock soaring and carrying related names alongside it. However, the rally quickly reversed on Thursday with Nvidia ultimately ending the trading session 3% lower.
While the U.S. chipmaker’s earnings initially appeared strong enough to quell concerns over an AI bubble, economic speculation put global investors back on the defensive as hopes dimmed of a December rate cut by the Federal Reserve. The U.K.’s hotly anticipated Autumn Budget is also expected next week.
Asia-Pacific markets fell Friday, led by tech heavyweight SoftBank, which plunged more than 10%. European stocks followed suit with a negative open. Stateside, however, appetite may have already reversed – again – as futures rose.
“I think the market is quite confused as to why this is happening,” Ozan Ozkural, founding managing partner at Tanto Capital Partners, told CNBC’s “Squawk Box Europe” on Friday.
Market moves this year have been driven by sentiment, momentum, AI and innovation, “with sprinkles of geopolitical risk,” he said. “Although we haven’t got a specific reason why there has been a sell-off on the back of the strong Nvidia results, to me it’s not that surprising, because [it’s] only a matter of time until sentiment just shifts, because we just live in a much more uncertain world.”
There also doesn’t need to be a catalyst, he added. However, the “most dangerous place we can be at” is a sustained sell-off, even if it’s a slow burn, Ozkural warning, noting that this could lead portfolio managers to lock in gains and cash out.
Asset managers are driven by compensation cycles which is why they don’t like to hedge their bets, he said. “No one cares about the long term. Everyone is dead in the long term. No one even cares about the medium term. It’s all about short term cycles,” he said.
“But the reality is, it’s year end, people need to get paid their bonuses, and it doesn’t pay to be bearish unless we see a sustained level of a sell-off.”
Investors with cash in an AI ETF or index may be cashing out due to a mixture of year-end risk management and continued concerns over an AI bubble. Those who may have made a lot of money on the back of the AI trade will probably want to step back and sell, said Stephen Yiu, investment chief at Blue Whale Growth Fund, which has a position in Nvidia.
Fed rate cut
The last bit of big news the market is expecting is the Fed’s December rate decision; investors had anticipated a cut but are now split on whether it will happen.
The central bank opting to not cut rates is “not an issue,” Yiu said, but could lead investors who had expected it to cut, to pause and recalibrate ahead of next year.
“I think people just want to probably lock in and derisk, and take a break from [President Donald] Trump as well, who knows what Trump is going to next,” he added.
Amid the hype, it’s difficult to work out the AI winners and losers, Yiu said, but he expects a differentiation between the companies investing in AI and those on the receiving end of that cash, which he called AI infrastructure. As the market shakes out, Yiu is placing his bets on the latter.
