Investor confidence was severely shaken by Broadcom's disappointing earnings guidance and rumors of Oracle project delays, triggering a sharp market sell-off. Broadcom's shares plummeted 12% on Friday, while the Philadelphia Semiconductor Index fell 5%, marking its largest decline in months. The equity sell-off even spilled over into the bond market, with significant spikes observed in the yield premiums of AI giants' bonds. This chain reaction may be prompting a critical question: how much patience does the market still have for the promised returns of AI?
A frenzy fueled by artificial intelligence (AI) met a harsh 'reality check' on Friday. When chip giant Broadcom and cloud service provider Oracle delivered unfavorable news, the market's overinflated expectations were abruptly deflated.
On Friday, December 12, a wave of sell-offs swept through AI-related stocks. $Broadcom (AVGO.US)$ The stock price plunged by as much as 12%, dragging both the S&P 500 Index and the Nasdaq Composite Index down by more than 1%, completely reversing the record highs achieved earlier in the week due to expectations of an interest rate cut. $Oracle (ORCL.US)$ It continued to drop by over 4%.
The declines of Broadcom and Oracle quickly spread across the entire AI supply chain, $PHLX Semiconductor Index (.SOX.US)$ plummeting 5% and heading towards its worst single-day performance in about two months. At the same time, it severely impacted the stock prices of companies ranging from NVIDIA to cloud service provider CoreWeave.
Market panic spread rapidly, with the Mag7 stocks underperforming significantly compared to the other 493 companies in the S&P 500 Index. More critically, this shockwave was not confined to the stock market; bond traders also moved swiftly to reduce their exposure to the sector. According to MarketAxess, the yield premium demanded by investors holding Oracle bonds surged dramatically.
This sell-off was triggered by two major blows. First, chip designer Broadcom released its earnings report after Thursday's market close. Despite posting record-high sales, its revenue forecast for the AI business fell short of Wall Street's lofty expectations.
Second, shortly after Oracle reported disappointing earnings, it was revealed that the completion date for some data centers it is building for ChatGPT owner OpenAI might be postponed from 2027 to 2028. This directly raised questions about the pace of AI infrastructure development.
This series of chain reactions underscored the critical importance of the AI narrative to the current market, capable of dragging down the entire index. It also posed a central question to investors: How much patience does the market have left for the promised returns of AI?
Unmet Expectations Trigger Chain Reaction Following Broadcom Earnings Report
Friday's market dynamics provided investors with an excellent case study of what happens when reality collides with high expectations. Broadcom announced record sales of $18 billion and robust profit growth late Thursday evening. However, market sentiment deteriorated rapidly.
According to analysis by The Wall Street Journal, investors focused on several key issues: the profit margins of its custom AI chips, the timeline for promises from giants like OpenAI, and the company’s visibility into its business beyond 2027.
When the answers to these questions failed to satisfy the market, its stock price plummeted by 11%, making it one of the worst-performing components of the S&P 500 Index and quickly spreading the chill to other AI concept companies.
Oracle's woes were compounded as below-expected earnings reports and rumors of data center delays shook investor confidence.
Even before the Broadcom news, Oracle had already unsettled the market. The database software giant’s previously released earnings report showed that its revenue fell short of analysts’ expectations while capital expenditure exceeded forecasts.
Subsequently, a Bloomberg report about potential delays in its data center being built for OpenAI became the straw that broke the camel’s back. Despite an Oracle spokesperson denying the claims, stating that “there are no delays at any sites fulfilling contractual commitments, and all milestones are proceeding as planned,” this did not stop investors from selling off.
Oracle shares fell 4.5% last Friday, with a cumulative drop of 13% for the week. RBC Capital Markets analyst Rishi Jaluria noted: 'People now view Oracle as a bellwether and are contemplating what this means for chips or electricity? There are significant downstream effects.'
The sell-off spread, sparing neither the chip industry nor the bond market.
The impact of this sell-off extended far beyond just Broadcom and Oracle. As the biggest beneficiaries of the AI boom, the world's most valuable company, $NVIDIA (NVDA.US)$ saw its stock price fall by 3.2%. Other chip-related companies like Astera Labs experienced declines of over 10%. $Astera Labs (ALAB.US)$ and $Coherent (COHR.US)$ AI computing service provider Futubull AI $CoreWeave (CRWV.US)$ also fell by 10%.
The sell-off even spread beyond the technology sector, affecting power-related stocks such as Constellation Energy and Vistra Energy. $Constellation Energy (CEG.US)$ 、 $Vistra Energy (VST.US)$ Others also experienced declines.
More notably, the bond market also felt the chill. Trading volumes of bonds issued by so-called 'AI hyperscalers' like Oracle, Microsoft, and Meta surged abnormally. According to MarketAxess, the yield premium demanded by investors to hold Oracle’s 5.95% bonds maturing in 2055 jumped by approximately 0.2 percentage points over U.S. Treasuries, reaching 2.07 percentage points.
Market divergence under the 'AI reality check'
The 'reality check' in the AI sector contrasts sharply with the optimistic sentiment fueled earlier this week by dovish signals from the Federal Reserve. Previously, bets that declining interest rates would revitalize the economy had driven investors into cyclical stocks such as banks, industrials, and materials.
Some analysts believe this rapid reversal precisely underscores the centrality of AI trading to the market. Steve Wyett, Chief Investment Strategist at BOK Financial, stated: 'The market will face a significant question: How patient must we be as these companies transition from the enthusiasm phase of AI development to the period when we begin to expect returns?'
However, some investors hold an opposing view. Robert Edwards, Chief Investment Officer at Edwards Asset Management, argues that the current widespread anxiety caused by high AI valuations and substantial expenditures actually represents a healthy sign of caution, suggesting there may still be room for the market to rise.
He pointed out that this 'wall of worry' serves as a contrarian indicator, implying that as long as concerns persist and significant funds (such as the $7.7 trillion held in money market funds) remain on the sidelines, the stock market has the potential to continue its upward trajectory.
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Editor/KOKO
