A.I. Stocks Succumb to Selling Pressure
By: David I. Templeton, CFA, Principal & Chief Investment Officer
Author: David I. Templeton, Principal and Chief Investment Officer
Some of the leading Artificial Intelligence related stocks have encountered turbulence since the fourth quarter of last year. Sparking the pullback seems partly due to the race among many of the Magnificent 7 stocks to invest in A.I. businesses and in doing so by taking on large amounts of debt in part to build out data center capacity. Included with the Mag 7 stocks in the below chart is Broadcom (AVGO) and notable is the fact the only stock ahead of the S&P 500 Index since the end of October is Alphabet (GOOGL) and it is under recent pressure as well.
With the technology sector, plus Alphabet (GOOGL, GOOG) and Meta Platforms (META), accounting for more than 40% of the S&P 500 Index composition, it might seem surprising the S&P 500 Index remains within less the 3% off its high. However, the selling in the technology/A.I. related names is generating cash and some of this cash seems to be rotating into other areas of the stock market. This is evident by the S&P 500 Equal Weighted Index (RSP) being up 7.95% versus a flat S&P 500 Cap Weighted Index return as seen below. Also benefiting from this rotation are the higher quality Dividend Aristocrats whose index (NOBL) is up 12.2% since October.
The rotation into other areas of the large cap market is evident in the performance of the S&P 500 Index sectors too. The Materials and Energy sectors are outpacing the worst performing Technology sector which his down -7.2% since the end of October 2025.
Another characteristic of the recent market performance is the market reacting to the anticipated disruption A.I. might cause to companies in other industries. What is notable about some of the companies in these industries, like Software as a Service (SaaS), is the fact some of the companies were thought to have wide moats around their business. Maybe those moats are narrower given A.I.'s ability to disrupt these software companies, like an Adobe and their Adobe Creative product. Similar disruption is occurring with trucking brokers and with insurance brokerage businesses. Below is a chart of the iShares Technology Software Sector ETF (IGV) with trucking and insurance broker stocks suffering similar declines more recently.
Finally, what seems to be the catalyst for this recent volatility spike is Anthropic's release of its A.I. engine Claude 3.5 Sonnet. In a recent article comparing Claude to OpenAI, Anthropic vs. OpenAI; What's the Difference?, it was noted,
"This new layout creates an environment of greater collaboration with AI. Sonnet becomes an interactive workspace because you can edit and add to Claude's real-time outputs. Imagine you decided to open a small cafe and coffee roastery. By uploading your sales and marketing data directly to Claude 3.5 Sonnet, you can analyze and forecast trends, discover your customers' preferences, and determine the best product mix for your fresh-roasted coffee beans."
There are differences between Claude 3.5 Sonnet and OpenAI's line of AI products. Again, as noted in the above linked article comparing the two, "While Claude 3.5 Sonnet can interpret images and extract text and meaning from those images, it cannot generate them like ChatGPT can using its image model DALL·E3. If your project requires AI image or video generation, you'll have to use another AI or manually create those images and videos."
In summary, the valuation of some of these AI associated stocks became elevated and the Anthropic release of Claude 3.5 Sonnet, served as a catalyst for investors to take profits. AI is not likely going away and likely does not fully disrupt businesses; however, companies that do not adapt to this new environment could find unsuspecting headwinds to their business models.
Disclosure: Firm/family long AVGO, AAPL, AMZN, GOOGL, MSFT, NVDA
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