JPMorgan Chase & Co. said in a new note to its clients that the recent sell-off in artificial intelligence stocks may be nearing its end, citing signs that investors’ positions in the stocks have seen a notable readjustment since mid-September.
Strategist Nikolaos Panigirtzoglou noted that JPMorgan Chase & Partners' comprehensive measure of equity positions reflects levels far lower than at the recent peak.
Despite some near-term pressures, he noted that adjustments in positions may begin to limit further declines.
Addressing recent concerns about funding for Neoclouds, JPMorgan Chase & Co. argued that the AI capital spending cycle will not falter even if the funding model for these companies proves unsustainable.
Panegirtzoglou wrote: Neoclouds does not represent a pivotal or large sector within the overall artificial intelligence ecosystem.
Of the total cash flow of approximately $2.2 trillion and the expected capital expenditure of approximately $1.8 trillion this year for publicly traded technology companies around the world, Neoclouds account for only about $30 billion and $80 billion respectively.
The strategist added: In other words, other technology companies with stronger balance sheets and more diversified revenue streams, such as large cloud computing companies (hyperscalers), can absorb the AI infrastructure that Neoclouds are building.
The technology sector is also generating a funding surplus of approximately $400 billion this year, with cash flow exceeding capital expenditure. JPMorgan Chase & Co. explained that the sector is primarily issuing debt to maintain share buyback programs while simultaneously increasing its capital spending.
If funding concerns widen, companies may resort to postponing buybacks or adopting more circular financing methods.
Panigirtzoglou concluded by saying: In other words, the technology sector, thanks to achieving an overall funding surplus, has internal funding reserves.
The bank noted that semiconductor stocks now account for roughly one-fifth of total capital at risk in global equity markets, making them vulnerable to sell-offs associated with market volatility. JPMorgan Chase & Co. suggests that hedge funds and momentum-driven investors, such as automated trading funds (CTAs), have largely closed their long positions in semiconductor stocks.
