The upcoming quarterly earnings of major US technology companies will serve as the next critical test for the artificial intelligence (AI) investment cycle, even as investors debate whether the market is experiencing 'AI fatigue' and rotating toward cheaper markets such as India and China, according to a Jefferies report.
Jefferies Report Highlights 'AI Fatigue' and Rotation
The report, titled 'AI fatigue and rotation,' stated: 'The new quarter has begun with much talk of AI fatigue as investors look out for a peaking out of momentum and rotation into cheaper value names which have not been part of the AI trade.' It cited Tencent as an example of this trend in Asia.
Jefferies noted that the recent correction in AI-related stocks does not signal the end of the AI investment cycle. 'Such corrections are both natural and healthy. But so long as the AI capex arms race continues the beneficiaries will remain the picks and shovels trade,' the report said, referring to companies supplying AI infrastructure.
Focus on Hyperscaler Earnings
Investors are now focused on the quarterly results of four major US hyperscalers—Alphabet, Amazon, Meta, and Microsoft—to assess whether AI spending remains on track and if these investments are starting to generate returns. 'This is why the next quarterly earnings announcements for the hyperscalers due to commence on 22 July will provide the next stress test for the AI story in general,' the report said.
According to Jefferies, the key concern has shifted from the scale of AI investments to whether hyperscalers will be able to monetize them. Uncertainty over returns is influencing investor sentiment, with markets also debating whether the recent decline in memory chip stocks signals a broader rotation or possible cuts in AI capital expenditure by hyperscalers.
Underperformance and Rotation Opportunities
The report noted that large US technology companies have underperformed the broader market in recent months, while concerns over AI monetization are increasing. Jefferies said a shift away from expensive AI-linked stocks could benefit markets outside the AI trade, including China and India, as investors look for value opportunities.
