It's no secret that recent advancements in artificial intelligence (AI) helped drive the current market rally. Since the advent of generative AI early last year, the market has enjoyed the start of a remarkable bull run even as concerns about the broader economy persist.
The combination of a carry trade and a rate hike by the Bank of Japan helped spark a worldwide sell-off that sent the major market indexes plunging. To make matters worse, news from Nvidia -- the poster child for AI, added fuel to the sell-off.
With that as a backdrop, "Magnificent Seven" stock Amazon (AMZN +2.02%) slumped 4%, Microsoft (MSFT 0.50%) fell 2.8%, Alphabet (GOOGL +0.14%) (GOOGL +0.14%) fell 2.2%, and Meta Platforms (META +0.29%) slipped 1.8%, as of 1:58 p.m. ET on Monday.
A check of all the usual suspects -- financial reports, regulatory filings, and changes to analysts' price targets -- revealed nothing in the way of company-specific news to explain the falling stock prices, which suggests many investors are keenly focused two other issues that had far-reaching effects.
Image source: Getty Images.
Falling dominoes
There were two separate catalysts that seemed to spark today's wide-ranging market declines.
The ongoing market rally encouraged some investors to participate in a "carry trade," borrowing Japanese yen at historically low interest rates and using the funds to invest in market leaders, including the Magnificent Seven.
Late last week, the Bank of Japan announced it would raise interest rates to 0.25%, up from 0.10%, in a bid to tame rising inflation. The move also boosted the Japanese yen, which has gained 8%. This sent Japan's stock market into a tailspin as investors sold their profitable trades and rushed to repay the borrowed yen. Furthermore, higher interest rates make borrowing more costly, which puts pressure on corporate profits.
NASDAQ: AMZN
Key Data Points
Unfortunately, the stock-selling spread like a contagion, sending markets lower across the globe.
Adding to the market carnage was news that Nvidia might delay the release of its highly anticipated Blackwell AI processor. A story that first appeared in The Information suggested a production design flaw was discovered, which could delay the launch of the next-generation AI chip by three months.
Nvidia pushed back, saying "production is on track to ramp" later this year, but fair-weather investors were already spooked and rushed to lock in profits.
The AI catalyst
Today's market rout aside, the next few years are shaping up to be a potentially profitable time for those invested in AI. Estimates vary wildly, but one of the more conservative takes suggests the market for generative AI could be worth between $2.6 trillion and $4.4 trillion annually, according to global management consulting firm McKinsey & Company.
Furthermore, as recognized leaders in the field, these stocks could have much further to run:
- Nvidia provides the graphics processing units (GPUs) that are the gold standard for AI training and inference. Sales of its chips have set records, and even a slight delay in the release of its next-generation processor likely won't hurt demand.
- As the "big three" cloud infrastructure providers, Amazon, Microsoft, and Alphabet are well positioned to offer AI services to their cloud customers, as well as integrate the technology across a broad cross-section of their other offerings.
- Meta Platforms used the reams of data collected from the billions of users on its social media platforms to create its Large Language Model Meta AI (LLaMA), which it offers to the major cloud providers for a fee -- representing a new revenue stream for the company.
NASDAQ: MSFT
Key Data Points
Given the magnitude of the opportunity, investors would do well to remember that the adoption of AI will play out over years and decades, not days and weeks. As such, it's best to tune out the day-to-day machinations of the stock market and focus on the future.
Furthermore, the resulting upside potential has driven valuations higher. That said, Alphabet and Meta Platforms are both still attractively priced at 21 and 23 times forward earnings, making them relative bargains. Microsoft and Amazon are both fetching a premium at 30 times and 34 times forward earnings, but given their historical performances, I would argue they have earned said premiums.
In a nutshell, the evidence suggests each of these four stocks is a buy for investors with a long-term outlook.
