US tech stock volatility and the AI wave

The sweetened sales and earnings guidance of Walmart Inc (NYSE:WMT) today failed to lift Wall Street’s mood after a week dominated by jitters over the sustainability of the AI investment story.

The retail giant reported second-quarter revenues growth of 4.8% to $177.4 billion (£132 billion) and raised estimates for 2025-26, including a net sales improvement in the range of 3.75-4.75%.

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Despite the upgrade and robust set of results, Walmart shares fell 4% in initial dealings as traders focused on margin pressure caused by tariffs and a backdrop of rising costs.

The Dow Jones Industrial Average reversed by 0.3% at the opening bell, while the tech-focused Nasdaq Composite stayed in the red following a fall of 3.5% in the past two sessions.

Investors have been on edge ahead of the Jackson Hole economic symposium, where a speech tomorrow by Federal Reserve chair Jerome Powell has the potential to be a market-moving event ahead of a possible September interest rate cut.

The AI trade behind the recent records of the S&P 500 and Nasdaq has also received a reality check, particularly after the Massachusetts Institute of Technology (MIT) said that 95% of corporations reported no measurable return from their generative AI investments.

This followed the comments of OpenAI chief executive Sam Altman’s that some investors are “overexcited” about AI. Meanwhile, semiconductor stocks have suffered from speculation that the US may seek more minority equity stakes in return for grants under the CHIPS Act.

The Magnificent Seven slid 1.1% yesterday after a 1.7% drop on Tuesday, marking the first time since the post-Liberation Day slump in early April that the group of mega-cap stocks has posted consecutive declines of more than 1%.

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In today’s session, Meta Platforms Inc Class A (NASDAQ:META) and Amazon.com Inc (NASDAQ:AMZN) opened 1% lower but Microsoft Corp (NASDAQ:MSFT) and Apple Inc (NASDAQ:AAPL) were near to last night’s closing level. NVIDIA Corp (NASDAQ:NVDA), which is due to report second-quarter results on Wednesday, also held firm.

Deutsche Bank said this morning: “We remain optimistic on the productivity impact of AI but the MIT report is a reminder that successful integration of new technologies takes time and that it’s still uncertain who will be the biggest end beneficiaries of the AI wave.”

UBS Global Wealth Management added today that the near-term tech volatility is not surprising given the run-up in valuations, advising investors against becoming overly defensive.

It notes that a large majority of tech companies beat both sales and earnings per share (EPS) estimates in recent second-quarter results, with a weaker US dollar acting as an additional tailwind.

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Forward guidance has also been resilient, bucking the typical trend of downward revisions during this reporting season. Notably, cloud revenues at the three largest platforms grew by an average of more than 25% year over year in the June quarter.

The bank’s 2025 S&P 500 EPS estimate stands at $265, implying 6% growth, and it sees potential for further upward revisions if current trends persist.

While AI revenue growth has not yet matched the pace of industry investment, UBS reported “encouraging signs of progress” as more companies embed AI into core products and services.

The bank added: “We expect Big Tech’s capex intensity - capital spending as a share of sales - to moderate after a period of heavy investment, supporting margin stability and further upside as AI applications achieve scale.”