Recent sharp declines have been observed in numerous technology stocks, including Microsoft (MSFT), NVIDIA (NVDA), Meta Platforms (META), and Palantir (PLTR).
Investment bank Wedbush has characterized the current market as entering a "Twilight Zone," describing repeated puzzling price action, but also pointing out that opportunities are emerging.
Similarly, Goldman Sachs suggests that as semiconductor stocks experience significant recent volatility, large-cap technology stocks may be becoming a more attractive allocation within the artificial intelligence (AI) investment theme.
Wedbush Sees Tech Sector 'Air Pocket' and Opportunity
While investor concerns over rising capital expenditures and escalating computing and storage costs nearing a tipping point may be driving the current pullback, Wedbush believes the market will offer new opportunities for patient investors.
Upon closer inspection, Wedbush states the market is currently in a temporary "air pocket stage."
This year's massive $700 billion in capital expenditure from tech giants is largely directed at building AI infrastructure, but investors in these large companies—particularly shareholders of Microsoft and Meta—are growing increasingly frustrated.
In a note to clients, Wedbush wrote: "Essentially, we are in a 6- to 12-month window where data center and compute infrastructure is being built at a rapid pace. However, large tech giants like Microsoft, Meta, and to a lesser extent Amazon (AMZN) and Alphabet (GOOGL) are currently in a waiting period, hoping to see a real wave of growth and commercial monetization."
Wedbush further noted this issue affects all hyperscale cloud providers, including Alphabet.
Just weeks ago, the company was seen as the "golden child" of this group, but recent departures of several AI researchers have heightened investor concerns.
Meanwhile, Meta may be at a critical juncture in its business transformation, but the company led by Mark Zuckerberg is investing heavily, and investors seem unwilling to wait indefinitely for the transformation to bear fruit.
Additionally, Apple's announcement this week of significant product price increases may have delivered a "negative shock" to the market.
Investors are beginning to question whether computing and storage costs have become unsustainably high and if AI infrastructure buildout needs to slow.
However, Wedbush explained, "We believe these costs will start to gradually decline over the next year. As consumer AI hardware, physical AI deployments, and enterprise AI applications ramp up over the coming years, today's concerns will become a distant memory, much like building the Las Vegas Strip in the 1950s, which seemed costly at the time but ultimately created long-term value."
Wedbush concluded: "Overall, many trading days make the current tech market feel full of bewildering moves. But in our view, this creates mispricing and opportunities for investors to position in the real winners of this still-long-term tech and AI bull market."
Goldman Advises Rotation into Tech Giants Amid Chip Volatility
Goldman Sachs strategist and head of asset allocation research, Christian Mueller-Glissmann, shares a similar view.
He stated that amid the recent sustained and sharp volatility in chip stocks, large-cap tech stocks may be becoming a more appealing allocation within the AI theme.
Mueller-Glissmann pointed out that while the primary drivers of the market rally have been chipmakers and AI capex beneficiaries rather than hyperscalers, the chip sector is also the most volatile part of the entire AI supply chain.
This segment not only has highly concentrated investor positioning but has also accumulated significant leverage through instruments like ETFs and options.
Mueller-Glissmann said: "If you still believe the AI trend will continue positively, you should diversify appropriately into hyperscale cloud companies, and perhaps reduce allocation to the chip sector, as it is the most volatile part of the entire AI capital expenditure chain."
Over the past few months, the chip sector has been the most popular AI investment play, with the Philadelphia Semiconductor Index (SOX) rising approximately 150% over the past year.
In contrast, hyperscale cloud companies including Amazon, Oracle, Microsoft, Alphabet, and Meta have lagged, as investors questioned the aggressiveness of their massive data center capital expenditures.
Discussing the chip sector's sharp rise, Mueller-Glissmann noted, "To some extent, it might be reasonable to modestly reduce exposure to this sector and diversify."
From a broader market perspective, Mueller-Glissmann stated Goldman's risk appetite indicator has continued to rise recently, initially driven by improved corporate earnings from AI capex, and more recently further boosted by the reopening of the Strait of Hormuz.
He said this creates a so-called "Goldilocks zone"—an ideal environment where inflation expectations are falling while corporate earnings growth remains relatively strong.
However, he emphasized that even with sustained investor optimism, it doesn't mean investors should now turn bearish, although positioning indicators show market risk appetite has clearly warmed.
Mueller-Glissmann added: "When everyone is bullish, it doesn't mean you should automatically turn bearish. But if the market starts to question the factors driving the current rally, there is indeed a risk of a pullback and correction."
Contrarian View: Dot-Com Era Analyst Warns of 'Speed Bump'
However, Dan Niles, a well-known semiconductor analyst from the dot-com era and founder of Satori Fund, warns that the AI trade is about to hit a "speed bump."
He believes smart money should flow to where AI capital is actually being spent—the chip industry—rather than the hyperscale cloud companies making the large investments.
Niles outlined his concerns, noting a significant shift in corporate AI strategy.
Just months ago, companies were focused on "Token maximization," encouraging employees to generate as many AI tokens as possible.
Now, the discussion has shifted to "Token minimization," as businesses realize they cannot exhaust their entire annual AI budget in just a few months.
He said: "Just like with Uber, you can't spend your entire AI budget in four months without running into issues when reporting earnings and providing guidance."
Looking ahead, Niles warned that due to the previous corporate push for "Token maximization," June quarter earnings are still expected to be quite strong.
But as companies start routing more requests to cheaper open-source models—some costing as little as one-eighth of high-end models—September quarter guidance could face pressure.
He stated: "My question is, if you are shifting tasks to cheaper models, what will your September guidance look like? This is precisely where I think these companies could hit a 'speed bump' when reporting earnings and providing future guidance."
Regarding his portfolio strategy, Niles said he is gradually reducing exposure to hyperscale cloud companies and also starting to trim some semiconductor holdings—despite the sector's strong performance.
He noted, "The semiconductor index has doubled," but emphasized that as the AI investment thesis evolves, investors need to become "more selective."
Niles's view reflects a reality where the bar for the AI trade is rising, as more investors question the justification for massive capital expenditure on AI infrastructure by hyperscalers.
Mere forward-looking potential is no longer sufficient; the market is starting to demand visible orders, cash flow, and profit realization.
This suggests investors will rotate towards areas benefiting from the AI capex wave, including the semiconductor industry.
Infrastructure Spending Seen Driving Continued Growth
Asset manager Columbia Threadneedle Investments holds a similar view.
The firm believes the tech stock rally, driven by accelerating AI infrastructure investment, is likely to continue for at least the next few quarters, with revenue and earnings expectations for related companies still being revised upward.
However, as the AI race enters a new phase, capital flows and competitive dynamics within the market are changing, with investors paying closer attention to which companies can truly benefit from the AI capex wave.
Tiffany Wade, a senior portfolio manager at Columbia Threadneedle Investments, stated in an interview that companies related to AI infrastructure are still in a strong growth cycle, with market expectations for their revenue and profit prospects continuously improving.
"The outlook for tech companies tied to AI infrastructure spending is very promising, and their revenue and profit forecasts are still being revised upward," Wade said.
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