The market rally stenming from artificial intelligence is starting to show signs of weakness. But investors are mostly unconcerned. Stocks have surged this year to record highs partly due to the potential of AI, but that enthusiasm has thus far benefited only a handful of hardware names. Nvidia , the chief exemplar of the AI trade, has climbed about 80% this year. Semiconductors as a group have been leading the market. And crypto stocks have advanced on higher bitcoin prices. But those groups’ advance may have started to falter. On Tuesday, Super Micro Computer, one of the biggest AI trades, tumbled after filing a new share offering, a sign the data center company is taking advantage of the runup in its share price. Nvidia is higher on the week, but swung between gains and losses as some investors booked profits. Bitcoin proxy MicroStrategy tumbled 13% just this week, as the price of bitcoin also pulled back from all-time highs. SMH 1D mountain VanEck Semiconductor ETF Taken together, these signals have some investors worried the AI rally could start to unwind, even if the long-term bull case remains intact. These observers say it’s time for investors to lock in their gains, and search for new market leaders. “What I’ve been saying repeatedly is I think the tech trade is really tired, especially the mega-cap,” Ritholtz Wealth Management’s Josh Brown told CNBC’s ” Halftime Report ” on Tuesday, adding, “I do not think that the leadership here can stay as dominant as it has been.” “We are looking at some unprecedented disparities between performance for the largest technology stocks and everything else,” Brown continued. “And at a certain point, the rubber band is stretched too far, and it always snaps back.” On Wednesday, however, tech stocks surged after the Federal Reserve kept interest rates unchanged and maintained an outlook for three rate cuts this year. That was a relief for investors who worried before the meeting that the central bank could turn more hawkish. Each of the so-called Magnificent Seven stocks rallied following the decision. Stretched too far Investors who expect that the AI trade has further to go point to strong fundamentals for the tech masters, contrasting them to valuations during the dot-com bubble of the late 1990s when internet companies were stretched to preposterous levels. Back then, Cisco, for example, had a trailing 12-month price-to-earnings ratio of roughly 300. Today, Nvidia has a trailing P/E ratio of roughly 74 times earnings. But some note that even those profitable fundamentals are starting to weaken. Strategas Securities’ Ryan Grabinski, for example, observes that net income for nine of the top 15 AI stocks are expected to slow in 2025 versus 2024. “The fundamental story was largely able to carry the names this year as companies invested and continue to invest” in AI applications, Grabinski wrote on Wednesday. “Perhaps animal spirits will remain for ‘AI’ or the fundamentals will get revised higher, but it is getting more challenging to justify further appreciation from the fundamentals at this juncture.” “We wouldn’t want to bet against the theme, but it is not a terrible time to think about reducing exposure in our view,” Grabinski wrote. Other signs also point to weakness in the AI trade. Ritholtz’s Josh Brown noted that 60% of the components of the VanEck Semiconductor ETF (SMH) are above their 50-day moving average, the lowest going back to November. Given this, more investors say that investors should start to move to other parts of the market, whether they be underperforming sectors, or second-derivative plays of the AI trade. “I do think that upward momentum at this point, technically in the market, it does look like it is slowing as valuations kind of move into that fully valued, or overvalued, territory,” said Dave Sekera, chief U.S.market strategist at Morningstar. “And I think now’s a good time for investors to shift away from the trend that had been working since the end of 2022, and start looking into and thinking more about different types of contrarian plays, those that are undervalued and have been left behind by the market,” Sekera added. He advised investors to get into real estate, utilities and energy sectors. One under-the-radar AI pick he noted was Cognizant Technology Solutions , which he said is trading at a 20% discount to Morningstar’s fair value estimate. A shift into other players Still, investors are overall positive on the long-term dynamics of the AI trade, saying the opportunity is still in its early stages, and that any dips should be bought. “There was definitely a momentum trade that kind of got built into the AI trade out there,” said Angelo Zino, analyst at CFRA Research, who has a buy rating on Nvidia. He added: “If you’re more of a short-term investor, that causes you to also maybe start kind of taking some of your gains.” “But ultimately, what that also does is if you are a long term investor, it provides an opportunity for long-term investors to depend on you to potentially take the other side of that trade on a big enough pullback,” Zino said. If anything, the AI trade could shift to other market leaders. On Monday, for example, Alphabet shares jumped more than 4% on reports that Apple is discussing licensing the Google parent’s Gemini system for use in future iPhones. In fact, investors are looking to upcoming Google and Apple developer conferences in May and June, respectively, for news of further progress in integrating AI into their offerings. “We’re just the beginning of this,” said Art Hogan, chief market strategist at B. Riley Securities. “I think the evidence that you would look at the moves that we saw [Monday] with both Apple and Alphabet, you know, the potential for them to partner up to to get artificial intelligence in the next rollout of iPhones. So, I think there’s a there’s a renewed enthusiasm, but for other players.” For Nvidia, at least, many investors are in it for the long haul, especially after the unveiling of its latest generation of Blackwell chips only highlighted the market potential of the company led by CEO Jensen Huang. “I don’t know how anybody competes with that chip they just announced,” said legendary investor Louis Navellier, chairman and founder of Navellier & Associates , who counts Nvidia and Super Micro Computer in his core holdings and said he has no intention of selling either stock. “We’re having a ball,” said Navellier, a growth stock analyst who founded his firm in 1987. “And we’re not delusional or anything, but I do think the stocks are for real.” — CNBC’s Michael Bloom contributed to this report.
