Key facts
- Investors are reassessing the AI trade amid calls from industry leaders to slow frontier AI development.
- Bernstein analysts believe a slowdown in frontier AI development does not necessarily imply a slowdown in AI spending.
- Demand for AI compute is increasingly driven by inference, and current capacity is insufficient to meet this demand.
- Stronger AI safeguards could support long-term adoption by easing political and societal concerns.
- Evercore suggests the next phase of the AI trade may favor enterprise software companies that deploy AI models.
- The iShares Expanded Tech-Software Sector ETF gained 5% while the iShares Semiconductor ETF fell 6% on Monday.
Wall Street is reassessing the AI trade following calls from industry leaders to slow the development of frontier AI. While some investors fear a potential spending slowdown, analysts suggest that a more measured pace could benefit enterprise software and cybersecurity firms, and that demand for AI compute remains strong.
Bernstein analysts wrote that a slowdown in frontier AI development does not necessarily imply a slowdown in AI spending. They noted that Anthropic CEO Dario Amodei is proposing to slow development from "extremely fast" to "only somewhat fast," not halt it, and that demand for AI compute is increasingly being driven by inference. The firm added that there is already insufficient AI computing capacity to meet demand, making it unlikely that companies would materially scale back their AI spending plans. Bernstein also argued that stronger AI safeguards could support long-term adoption by easing political and societal concerns about the technology.
Evercore analysts suggested that the next phase of the AI trade may favor software companies that help businesses deploy AI models. They noted that most software companies are consumers of AI models rather than developers, meaning their success depends more on deploying models inside businesses than on how quickly frontier AI improves. If frontier AI development becomes "somewhat less frenetic," the relative value of software that helps companies deploy, govern, and secure AI could increase, benefiting enterprise software and cybersecurity firms.
On Monday, the iShares Expanded Tech-Software Sector ETF gained 5% while the iShares Semiconductor ETF fell 6% as investors bet a slower pace of frontier AI development would favor software over AI infrastructure. RBC Capital Markets analysts cautioned that this initial reaction might overlook the opportunity cost of deferred AI adoption and that companies dependent on frontier AI advances could have more upside than currently expected.
Charu Chanana, Saxo's chief investment strategist, wrote that the market reaction reflects changing expectations more than changing fundamentals, viewing it as a sentiment and valuation shock rather than a collapse in AI demand. She added that calls for more AI testing should not be mistaken for a pullback in AI investment, but warned that if fewer frontier models are released or massive training programs are reduced, demand for advanced processors and memory chips could fall short of expectations, potentially leading to excess supply and weaker prices.