After markets responded to US tech giant Nvidia earnings amid potential volatility, Mark Haefele at UBS Global Wealth Management, together with Saxo UK, discuss factors behind the volatility and the long-term potential of artificial intelligence.

The S&P 500 and tech-heavy Nasdaq drifted lower on Wednesday as investors braced for Nvidia’s second-quarter earnings' results, which were released after market close. Nvidia, seen as a driver behind the growth story of artificial intelligence and the overall market, delivered an earnings beat, surpassing consensus estimates for both earnings per share and revenue.

The chipmaker's revenue increased by 122 per cent year-over-year to $30 billion, exceeding forecasts of $28.73 billion. Despite these numbers, Nvidia's stock fell almost 7 per cent in after-hours trading, likely reflecting investors' heightened expectations heading into the report. Since the sell-off earlier this month, Nvidia’s shares have already rebounded nearly 30 per cent amid the broader equity market recovery.

“Nvidia shares reflect how investors have become too accustomed to exceptional results,” Wiliam Marsters, senior sales trader at Saxo UK, said. “Given the reasonably positive earnings and guidance, the market reaction highlights how investors have become too accustomed to exceptional results.” In the pre-market, the shares already regained some of the after-hours drop, down only 2 per cent from Wednesday’s close, potentially indicating an overreaction Wednesday night. “As expected, we have seen increased trading activity in the lead up to the results, with clients skewed to the buyside,” Marsters said. 

Still, the massive spending on AI infrastructure has fueled worries about whether consumers and businesses will ultimately purchase enough AI services to justify the investments.

AI outlook
However, Mark Haefele, chief investment officer at UBS Global Wealth Management, continues to hold a positive structural view on the broader AI theme, and see ways for investors to manage their exposure to the technology that he thinks is set to drive growth in the years to come.

He believes big tech’s investments in AI are likely to grow further. “Big tech companies are on track to increase their capital spending by 43 per cent year-over-year this year, with managements highlighting their commitment during their latest earnings calls,” Haefele said in a note. His analysis shows that big tech’s capex could grow by as much as 25 per cent in 2025, boding well for AI enablers in the semiconductors space.

Recent comments from Walmart's management offered an example of how the use of generative AI has led to productivity gains as AI adoption continues to rise across industries. They’ve used multiple large language models to accurately create or improve over 850 million pieces of data in the catalogue. Without the use of generative AI, this work would have required nearly 100 times the current headcount to complete in the same amount of time, according to the company’s CEO, Doug McMillon. “The use cases for this technology are wide-ranging and affect nearly all parts of our business, and we’ll continue to experiment and deploy AI and generative AI applications globally,” he added.

Haefele also believes that AI monetization trends remain intact. The level of AI monetization has yet to match the strong investments by big tech companies, but evidence suggests that it has continued to pick up. Microsoft said it expects an acceleration in its cloud business revenue growth in the first half of next year, while Meta said the company is mapping its investments against significant monetization opportunities. With near-term core fundamentals still intact and strong free cash flow generation, Haefele expects markets to focus on improving monetization trends from next year.

“We recommend investors examine their AI exposure as they navigate tech volatility. Investors with low existing AI holdings should create a plan to build up long-term exposure to the theme. This can be done by utilizing structured strategies like put writing or reverse convertibles. Investors with a high allocation may consider capital preservation strategies as a hedge,” Haefele said.