AI Stocks Falter Despite Record Sales as Oil and Fed Fears Grip Markets

AI and Cyber Stocks Face a Reality Check

The S&P 500's longest winning run in over a year came to an abrupt halt, dragged down by rising oil prices, higher government bond yields, and the very technology stocks that propelled its ascent. Pre-market trading points to further weakness, particularly in chipmakers. This signals a potential turning point for a sector that has driven market gains for over a year, with valuations now facing intense scrutiny.

Broadcom's Perfect Quarter Isn't Enough

Broadcom delivered what should have been a triumphant quarter. The chipmaker's revenue climbed an impressive 48% from the previous year, with AI-related sales jumping by 143% to $10.8 billion and total sales hitting a record $22.2 billion. The company guided for continued acceleration, projecting third-quarter revenue of around $29.4 billion. Yet, despite these strong figures, the results fell short of the market's even higher expectations, sending shares tumbling roughly 15% in extended trading.

The main reason for the sell-off was subtle but significant: the company's chief executive merely repeated a previous long-term goal of hitting $100 billion in AI chip sales by fiscal 2027. Investors, who had pushed the stock up 40% this year, were betting on an upgraded forecast. The lack of one was taken as a sign that explosive growth might be plateauing.

Cybersecurity Suffers the Same Fate

Cybersecurity firms, despite being major beneficiaries of AI, are also struggling to meet sky-high expectations. The entire sector has seen enormous investor inflows, with the Global X Cybersecurity ETF ($BUG) adding around $280 billion in market value this year alone.

However, individual company results tell a cautionary tale:

• CrowdStrike beat earnings estimates, raised its full-year guidance, and announced a four-for-one stock split. Despite revenue growing an impressive 26%, the stock still dropped around 10% as its billings—a key indicator of future revenue—missed analyst forecasts.
• Palo Alto Networks also saw its shares slide by around 6% despite raising its full-year outlook on revenue of $3 billion.

CEOs in the sector argue that AI is a net positive, acting as a "tailwind to the cybersecurity industry." However, with stocks like CrowdStrike and Palo Alto up around 60% this year, it's clear that simply clearing the bar is no longer enough for investors who were demanding a giant leap.

A Wave of Mega-IPOs Approaches

Several of the world's most valuable private companies are preparing to go public, which could draw significant money away from existing market leaders as investors look for the next big thing.

SpaceX Sets Terms for Record-Breaking Debut

Elon Musk's SpaceX is poised for one of the largest stock market launches in history. According to a new regulatory filing, the company plans to sell 555.6 million shares at a fixed price of $135 each to raise around $75 billion. This would value SpaceX at approximately $1.77 trillion, making it one of the largest US firms by market capitalisation. The company has also unusually reserved up to 30% of the offering for retail investors.

However, there's a catch. SpaceX is only releasing 3% to 4% of its shares for public trading, a tiny amount known as a small "float." This could cause extreme volatility. Heavy demand chasing very few shares often leads to a sharp price spike on the first day, followed by a rapid fall as early investors sell. With analysts at Morningstar calling the company "significantly overvalued," the valuation is steep, and historical data shows that even major IPOs often see their stock fall significantly in the first year.

Anthropic and OpenAI Join the Race

Adding to the IPO pipeline, AI research firm Anthropic, maker of the Claude assistant, has confidentially filed its paperwork to go public. Valued near $965 billion, it is racing against its main rival, OpenAI, which is expected to file its own listing documents within weeks. This sets the stage for a major battle for investor capital in the generative AI space.

Quantinuum Enters the Quantum Race

Honeywell-backed Quantinuum is set to join the fray, pricing its Initial Public Offering at $60 a share to raise $1.68 billion. The listing is a milestone for the quantum computing sector, but it remains a highly speculative field. None of the companies in this space are profitable, and all are expected to post losses for the foreseeable future, making it a high-risk bet for investors.

Economic Crosscurrents

Global economic optimism is being tested by conflicting signals, from easing geopolitical tensions to stubborn domestic inflation data that complicates the outlook for interest rates.

Geopolitical Tensions Ease, But Risks Remain

Fears of a wider conflict in the Middle East have eased after Israel and Lebanon announced a joint ceasefire. This news helped pull oil prices back after a spike on Wednesday, providing some relief to the market. However, the situation remains fragile. The OECD has warned that a prolonged disruption in the region could slash global growth to just 1.8%, the weakest pace in 40 years outside of major crises. Any setback could cause oil prices, and therefore inflation, to spike again.

Strong Jobs Data Dims Rate Cut Hopes

The case for interest rate cuts from the US Federal Reserve this year is fading fast. Recent data showed private employers added more jobs than expected, and job openings reached a two-year high. Combined with figures showing rising input costs for service businesses, the evidence points towards a resilient economy where inflation may remain stubbornly high. Markets are now pricing in almost no chance of a rate cut at the Fed's next meeting on June 16-17, with some even anticipating a potential hike later in the year if inflation doesn't cool.

Investors Hunt for New Growth Frontiers

With the mainstream AI trade looking crowded, investors are beginning to explore related sectors that stand to benefit from the technology's second-order effects.

The Rise of Humanoid Robots

Wall Street is starting to bet on a new workforce of steel-collared workers. Humanoid robots are seen as the next major wave of automation, designed to fill labour shortages in manufacturing, logistics, and construction. Barclays projects the market could grow from under $3 billion today to $200 billion by 2035, while other analysts see a potential multi-trillion dollar opportunity over the next decade. China currently has a structural lead, accounting for the vast majority of humanoid robot installations last year.

The AI Power Drain: A Gold Rush in Battery Storage

The enormous power demands of AI data centres are sparking a boom in battery storage. Companies are rushing to build huge battery installations to store power and stabilise electrical grids. Morgan Stanley projects that battery installations could surge from 57 gigawatt-hours last year to 279 gigawatt-hours by 2030, driven by AI's insatiable appetite for electricity.

This trend is creating opportunities for companies like Ford, which has launched a new battery storage division, and specialists like Fluence Energy. The market is currently dominated by Chinese firms, but US tariffs and domestic manufacturing subsidies are creating a more favourable environment for American competitors.

Nuclear Power's Unexpected Rally

A rare convergence of factors is fuelling a rally in nuclear energy stocks. The immense power demands of AI data centres, a new ban on Russian uranium imports, and NATO's potential expansion are all creating a powerful tailwind for the sector. With S&P Global projecting data centre power demand will triple by 2030, nuclear is emerging as a reliable solution. This has boosted a range of companies, from uranium miners like Cameco ($CCJ) to reactor infrastructure firms and even defence contractors involved in nuclear weapon systems.

Corporate and Sector Watch

• SoftBank's AI Gamble: The Japanese tech investor's shares have surged about 70% this year, driven by enthusiasm over its stakes in chip designer Arm and AI leader OpenAI. However, some analysts are raising concerns about its mounting debt and high-risk strategy, drawing parallels to its disastrous multi-billion dollar bet on WeWork.
• Macy's Boosts Outlook: In a positive sign for retailers, Macy's raised its full-year forecast after a strong quarter. Sales were driven by its luxury brand, Bloomingdale's, suggesting higher-income consumers are still spending confidently.
• Lululemon Under Pressure: In contrast, athletic-apparel maker Lululemon is struggling. Its stock is down 38% this year ahead of its earnings report, hit by slowing sales in North America and tough competition.
• GameStop's Buyback: Meme stock favourite GameStop announced a $2 billion share buyback programme. This is a move by a company to purchase its own shares, which reduces the number outstanding and can signal that management believes the stock is undervalued.
• Used Electric Vehicles Surge: Sales of used electric vehicles jumped 17% as a flood of off-lease models hits the market at lower prices. With nearly 40% of used EVs now priced below $25,000, they are becoming competitive with traditional petrol cars for the first time.
• Biotech's Brain-Barrier Breakthrough: Companies like Denali Therapeutics and Roche are making progress on technology to get drugs into the brain more effectively. A success for Roche's Alzheimer's antibody could open up a market worth over $13 billion annually, highlighting the high-stakes innovation in the pharmaceutical sector.
• Crypto Consolidation: Noble Mobile has acquired Helium Mobile, a mobile carrier built on the Solana blockchain. While the deal terms are undisclosed, it shows ongoing deal-making in the digital asset space, even as specific crypto token prices remain volatile.

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NOTE: This content is for informational and educational purposes only and does not constitute financial advice. Always do your own research. Not financial advice (NFA).