The AI investing story had a rough week. It may be time to take profits while you still can

Market professionals are sounding worried about the artificial intelligence trade after a big week of data points in the technology sector.

Investors are focused on the scale of the AI build-out and whether returns are materializing fast enough to justify it.

The overall stock bull market driven originally by the AI boom remains intact, with the S&P 500 just a few percent off a record. A rotation into non-AI stocks like Procter & Gamble and Berkshire Hathaway have stepped in to support the market. But AI-related shares are already in a bear market or teetering on one.

It may be time to take some profits or hedge your risk.

This week, frontier algorithm maker Anthropic's public filing document didn't contain much information on forthcoming revenues after the company reported a deceleration in sales from the second to the third quarter. At the same time, we learned from the Big Tech earnings reports that hyperscalers are pulling back on their capital expenditures, suggesting they see a terminal level of required computing power at some point in the future.

We've reached the point where rofits need to be showing up in force from AI to justify the buildout that's happened so far and is still to come, investors and traders say.

Global X Artificial Intelligence & Technology ETF, YTD

"You want to make sure that the reward is worth the risk," JJ Kinahan, SVP at Cboe Global Markets, told CNBC on Friday. "I think the reward will be [there], but it continues to be a lot of money up front."

Kinahan said he thought the recent AI boom over the past few years was "in question." 

AI-linked Technology stocks were getting housed on Friday in a variety of sectors. Intel was down 25% on lackluster revenue guidance, Micron was down 5.5%, and Nvidia was down 4%. 

Hyperscalers were also getting clobbered, with Amazon down 2% and Google down another 1%. Google had its worst trading day ever on Thursday after reporting a drop in its core advertising sales revenues.

Like traders, technology investors were also sounding down about the AI trade on Friday.

"I'm a little worried about the trade," Mike Khouw, YieldMax strategist, said. "I think we're probably going to get a little bit more chopping here."

Accordingly, options specialists say they're seeing more people pursuing downside insurance.

"Historically, tech stocks have call skews. So people are more willing to buy greed [with] upside calls than they are to buy insurance downside puts. I've seen that reverse in the last three days," Dennis Davitt, CIO and co-founder of Millbank Dartmoor Portsmouth, said.

There's another interesting signal coming from options, Davitt noted: While investors may be getting cold feet about the big tech companies associated with the AI trade writ large, they may also be gaining confidence about the commercial prospects of AI technology itself, specifically with new successful consumer agents, such as Meta's Muse.

"I think the ChatGPTs and the [other AI algorithms] of the world are actually taking over from the Amazons of the world as well as the Googles of the world," he said. "You see Muse of Facebook – If you look at options pricing in Muse, there's less fear priced in Meta than there is in Amazon."

Longer-term confidence in AI could be a silver lining for the slip in bread-and-butter ad sales reported by Alphabet this week. The stock fell by more than 10% after reporting earnings on Wednesday.

Google executive Philipp Schindler called attention to the growth of AI mode use at the company even as it still has lower monetization at this point.

"It's worth noting the strong growth in AI mode queries had an impact because of the lower monetization we are seeing in AI mode," he said Wednesday.

Still, the shifts in usage and monetization matter less to the fate of the AI trade than overall productivity and profit. All that capex needs to produce a profit, propelled by boosted productivity from businesses using AI.

iShares Semiconductor ETF, YTD

Macroeconomic reflections about this from top investors over the past few weeks are sounding rather gloomy, though nobody is super about the specific timing.

"Maybe the markets will continue to kick the can down the road," Paul Tudor Jones, Tudor Investment Corporation founder, said earlier this month, contemplating the possibility of a "tipping point" and saying that the odds were 60-40 that "we're down that path."

"[AI-related issuance as a share of GDP] is 50% more than railroads, triple that of highways, telecoms, the other big infrastructure buildouts in history. So that competition between AI buildout and sovereigns may take us to the tipping point," he added.

Technical analyst Jonathan Krinsky at BTIG recommended fading the chip bounce earlier this month, making comparisons in the SOX semiconductor index to some major down-legs in its history.

Investors were rotating away from the tech sector on Friday, with names like Coca-Cola, Walmart and Eli Lilly all up over 1%.