Is The 'AI Surge' Really Over?

Amid recent sharp volatility in the U.S. stock market, investors had been hoping that NVIDIA's (NVDA.US) earnings report would inject new vitality into the AI sector. However, the reality fell short of expectations.

The chipmaker's performance failed to ignite market enthusiasm. While its earnings exceeded expectations, they lacked the wow factor of previous quarters, and its outlook for the next quarter was mixed. Although NVIDIA alleviated some of the pressure on its stock price since the rise of AI startup DeepSeek earlier this year, significant questions about the sustainability of AI investments remain unresolved. Following the earnings release, NVIDIA's stock saw only a modest 1% increase in pre-market trading on Thursday.

"A couple months ago we were very certain of the growth component of AI," said Brian Mulberry, Client Portfolio Manager at Zacks Investment Management. "Where we are today, that seems to be a much wider range of outcomes than what it was before. And the volatility in these AI-related names are starting to reflect that."

The outlook for the AI services sector is even murkier. Salesforce (CRM.US), which began rolling out so-called AI agents last year, saw its shares drop more than 3% in pre-market trading after providing a disappointing earnings outlook. The company stated that its "Agentforce," designed to handle tasks like customer service without human guidance, is expected to contribute only modestly to revenue this year.

"Salesforce seems to be struggling a bit," said Chris Brigati, Chief Investment Officer at SWBC. The earnings reports from NVIDIA and Salesforce suggest that the AI boom may not be "anywhere near as robust as it was in 2023 or 2024, though it remains positive, with some room to grow. It's like we're dropping from fifth gear to fourth."

Nevertheless, Brigati remains optimistic about NVIDIA's market leadership in AI and views any pullback in the stock as a potential buying opportunity.

These earnings releases come at a delicate time for the AI sector. The rise of lower-cost AI models, such as DeepSeek, not only challenges U.S. dominance in this emerging field but also raises questions about the sustainability of massive corporate AI spending. Meanwhile, the tech industry is also grappling with uncertainties surrounding the impact of President Trump's tariff policies on the U.S. economy and inflation.

An index tracking the Magnificent Seven, including NVIDIA, has fallen 11% from its peak in December last year. The tech-heavy Nasdaq 100 Index has also dropped nearly 5% from its record closing level last week.

Despite tech giants like Meta Platforms (META.US) and Amazon (AMZN.US) reaffirming plans to increase capital expenditures this year, the stock prices of NVIDIA and other hardware manufacturers remain under a cloud.

Krishna Chintalapalli, Portfolio Manager at Parnassus Investments, noted that NVIDIA's solid performance will delay some of the major questions surrounding the AI boom for three to six months.

"The long-term debates haven't been resolved," he said. "There are questions on the sustainability of spending, LLM monetization, enterprise adoption. All those are happening, but we're still in the early stages."

Chintalapalli added that the uncertainty doesn't necessarily come from NVIDIA but from software companies and enterprise IT departments. However, once they start seeing tangible returns from AI, it could kick off the next cycle.

"The real concern is what things could look like 3-5 years from now."