It’s here. For months the question was if and when the stock market rally would end. And with the arrival of August, here we are. After Black Friday, today the week began with Asia in deep red. The Japanese index, the Nikkei, lost 12.4%. Never this bad since October 19, 1987. And in Europe things aren’t much better, starting with a -4% at the start of the day in Milan. Weighing on the markets are several factors. The concrete fear of a recession in the United States and the winds of war from the Middle East. But also the growing skepticism towards the race for artificial intelligence by Big Tech.
It all started on Friday with Tokyo dropping 5.8%. Then it was the turn of the European stock markets. All negative at the end of the day and with Piazza Affari at -2.55%, the worst. In two days, Milan burned almost 40 billion euros of capitalization, with rumors again of a tax on banks’ extra profits that did not help. And finally, the red on Wall Street that closed with the Dow Jones at -1.52% and the Nasdaq at -2.43. What is certainly making the stock markets nervous, on Friday as today, is the fear of an American recession. The negative data on the US labor market weighed heavily. Unemployment rose to 4.3% against the expected 4.1%. This has triggered uncertainty about the stability of the American economy and the possibility of a rate cut by the Federal Reserve in September.
But there is another issue worrying the markets. The strong optimism shown towards Artificial Intelligence corresponds to a certain skepticism on the markets. The Big Tech companies on Wall Street have invested 106 billion in just six months in the sector. It is expected that the billions will become a thousand in five years. The Big Tech companies have increased their spending by 50%, betting on AI. But the response from the markets is more than lukewarm, indeed. The technological sub-index with that -5% on Wall Street on Friday is the worst drop in two years. Amazon closed last week leaving 12% on the ground. Not to mention the collapse of Intel which, after the announcement of a 15% reduction in workers and after quarterly results well below expectations, collapsed on the stock market by 26%. And percentages in the red, even if less, for the others: Microsoft, Meta, Alphabet and Apple. It is true that the overall revenues of Big Tech exceeded 431 billion dollars in the first quarter of the year (+11.5%), but something is changing. Faced with so much money, the question seems to be increasingly widespread: is it really worth it?
At the end of July, analysts attending Google’s quarterly conference clearly asked management when the $12 billion invested in artificial intelligence per quarter will start to pay off. Banks and investors are starting to be skeptical: will all of Big Tech’s investments in AI really bring profits? Some analysts are starting to talk about a “new bubble”. An analysis by venture capital fund Sequoia Capital estimates that the artificial intelligence sector will need to generate at least $600 billion in revenue each year to make the outlays profitable and give stability to the sector.
All this weighs on the financial markets this week too. And more tests are coming. First, the data on the ISM American services confidence index, already on Monday afternoon. Then on Thursday the numbers on the weekly requests for unemployment benefits. Furthermore, the wind of a wider conflict in the Middle East is blowing ever stronger and closer. A turbulent August is expected for the stock markets all over the world.
