Over the past three years, artificial intelligence (AI) stocks spent most of the time doing one thing in particular: marching higher. The S&P 500, over that period, soared more than 78%. But in recent weeks, the stock market has been a rocky place, with the famous benchmark shifting from gains to losses. This is amid a wide range of concerns — such as uncertainty about the AI revenue opportunity in relation to today’s spending levels and worries about the geopolitical and economic environment.
Against this backdrop, investors haven’t been feeling confident. In fact, the market’s fear gauge just spiked to 24. History says this is what happens next for AI stocks…
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Before we take a look at what history tells us, however, let’s talk a bit more about the current market situation. As mentioned, the S&P 500 was flying high in recent years, led by well-known AI stocks such as Nvidia, Palantir Technologies, and Meta Platforms.
Investors recognized the game-changing power of AI and aimed to bet on players that could benefit. These are companies that develop, sell, and/or use this technology. AI has the potential to improve everything from office organization to factory operations — and supercharge innovation too. These and other uses of the technology could lower costs, increase revenue, and significantly boost earnings over time.
Investors were eager to get in on winning players early to benefit from this story, and companies have been spending billions of dollars to support their AI businesses. For example, big tech companies have pledged nearly $700 billion in capital spending this year — a great deal of this investment will support building out AI infrastructure.
But as this spending unfolds, some investors worry about the future revenue opportunity. Though demand for AI is high, they still question whether spending levels are justified. Meanwhile, the ongoing war in Iran and uncertainty about the pace of interest rate cuts in the U.S. have also shaken the market.
As a result, “the fear index,” more formally known as the CBOE Volatility Index (VIX), recently spiked. The VIX, created by the Chicago Board Options Exchange, focuses on volatility. This index offers us a glimpse of volatility expectations over the coming 30 days, and it’s based on options on the S&P 500. When the VIX climbs, it suggests that investors expect volatility ahead; when it falls or remains low, it indicates expectations of a steady market environment.
