AI Boom Faces Reality Check

The warning comes as shares in AI and semiconductor companies, which have attracted enormous investment on expectations of sustained growth, face renewed selling pressure following a landslide victory by the Democratic Party in the U.S. midterm elections.

Democrats won control of both chambers of Congress in the November 3 elections, raising concerns that tighter regulation could slow the construction of data centers, particularly in states where large-scale facilities have become a political issue.

The Nikkei 225 suffered a sharp decline on Friday, November 6, before rebounding by more than 1,000 points on Monday, November 9, highlighting the increasingly volatile nature of trading in technology-related shares.

Oki said investors had broadly anticipated a Democratic victory but were unsettled by the scale of the result and the possibility that political opposition could translate into restrictions on data center investment.

Subsequent comments suggesting that AI infrastructure spending would continue, together with expectations that data center development could shift toward more supportive locations, helped restore confidence and triggered a market recovery.

However, Oki characterized the rebound largely as a reaction to excessive selling rather than evidence that underlying concerns had disappeared.

The fundamental problem, he said, is that investors have little reliable basis for predicting what the AI industry will look like in five or ten years, or how individual companies will perform as the technology develops.

Even professional investors cannot confidently forecast the eventual winners, the scale of future earnings or how AI will reshape existing industries.

Despite this uncertainty, enormous amounts of money continue flowing into companies associated with AI, creating conditions in which relatively small changes in expectations can produce disproportionately large movements in share prices.

Oki described the situation as having an element of gambling, with investors committing substantial capital to a technological transformation whose ultimate commercial consequences remain unknown.

He expects this volatility to persist because AI has become such a dominant theme in global investment markets.

Japanese semiconductor companies and manufacturers of chipmaking equipment have been particularly vulnerable during the recent correction.

Oki noted that their share-price declines have generally been larger than those experienced by major U.S. hyperscalers, the technology companies responsible for operating enormous computing and data center networks.

Japanese companies had previously attracted strong interest as suppliers of equipment, components and materials needed to expand AI infrastructure. That exposure has now become a source of weakness as investors reconsider the pace of future data center construction.

Companies heavily dependent on semiconductor capital expenditure are particularly sensitive to any indication that U.S. technology giants may reduce or delay spending.

Kioxia was cited as an example of how unusually concentrated buying positions have contributed to recent market instability.

Oki said investors had accumulated substantial long positions in certain semiconductor stocks, while short-selling activity remained comparatively limited.

With so many investors already holding shares, the market had less capacity to attract additional buyers, leaving prices vulnerable when sentiment deteriorated.

He said some of these companies were trading at unusually low price-to-earnings ratios despite retaining potentially strong earnings prospects.

Under normal circumstances, such valuations might attract bargain hunters. Instead, the weight of existing positions and the recent intensity of speculative buying have prevented prices from recovering as strongly as their fundamentals might suggest.

Oki said the situation reflected an unusually extreme phase of market enthusiasm, followed by a correction in which the balance between buyers and sellers had become detached from underlying corporate performance.

To assess whether AI-related stocks had fallen too far, Oki compared valuations at the end of 2025 with those recorded around the market peak on June 25, 2026.

At the end of 2025, share prices had not fully incorporated expectations of a dramatic acceleration in capital expenditure by hyperscalers.

By June 25, however, investors had priced in an exceptionally optimistic outlook for AI investment, semiconductor demand and future corporate earnings.

Oki argued that reasonable valuations probably lie somewhere between those two extremes.

Using the midpoint as a reference, he found that several stocks still offered substantial potential upside compared with their closing prices on November 9.

This suggests that, despite the recent correction, some AI-related companies retain room for a recovery based on their underlying business prospects.

He emphasized, however, that attractive valuations alone do not guarantee an immediate rebound.

The market had experienced excessive buying through June, followed by a period in which positive and negative developments competed for investors’ attention. Selling pressure frequently outweighed new demand, even when companies continued to report favorable operating conditions.

As a result, Oki believes a significant gap has emerged between share prices determined by trading conditions and valuations supported by corporate fundamentals.

Another major test for the AI investment boom is the planned initial public offering of U.S. AI developer Anthropic, which is seeking to list its shares during November.

The company, known for its Claude AI models, was previously associated with valuation expectations approaching $2 trillion, but investor estimates have since declined toward $1.5 trillion as concerns grow over the sustainability of AI spending.

The offering could become one of the largest in stock market history and provide an important indication of investor appetite for companies developing advanced AI models.

Oki suggested the immediate market reaction to the listing could be relatively neutral, but warned that its broader consequences might be more complicated.

A large IPO would absorb considerable investment capital that might otherwise flow into existing listed companies, potentially placing additional pressure on other technology stocks.

He also highlighted the extensive risk disclosures contained in Anthropic’s prospectus.

Those disclosures reflect the technological, financial and societal uncertainties surrounding advanced AI, including the possibility of unexpected developments as increasingly powerful systems are deployed.

Oki said investors already harbor concerns that the rapid expansion of AI could produce unforeseen consequences.

Rather than resolving those concerns, Anthropic’s listing documents could reinforce them by drawing attention to the potential risks associated with the technology.

He cautioned that a successful IPO would not necessarily eliminate broader market anxiety about the future of AI or guarantee renewed enthusiasm for semiconductor shares.

The industry is also confronting uncertainty surrounding Nvidia, the U.S. semiconductor company whose graphics processing units have become central to the global expansion of AI computing.

The New York Times reported that Nvidia Chief Executive Jensen Huang had developed a relationship with a Chinese businesswoman whom U.S. intelligence officials suspected of working for China’s intelligence services.

Huang acknowledged having been unfaithful to his wife and apologized to his family, while Nvidia announced an independent investigation into whether he had been targeted by a foreign intelligence operation.

The company has said it has no reason to believe national security information or corporate secrets were compromised, and Huang remains committed to leading the business.

Oki expressed surprise that an executive occupying such an influential position could become involved in a situation raising potential intelligence and corporate governance concerns.

He said Nvidia’s organizational strength and technological capabilities would probably allow its operations to continue even if Huang were eventually forced to step down.

However, the symbolic consequences could be substantial because Huang has become so closely identified with the company’s success and strategic direction.

Oki compared the potential impact to the departure of Elon Musk from SpaceX or Masayoshi Son from SoftBank Group.

Although the direct effect on business fundamentals might be limited, losing such a prominent leader could significantly change investor perceptions.

This is particularly important for Nvidia because other semiconductor manufacturers and technology companies are developing alternative chips intended to compete with its GPUs.

Huang’s leadership has helped reinforce confidence that Nvidia can maintain its technological advantages and dominant industry position.

Without him, Oki warned, investors might become more receptive to arguments that competing chipmakers could eventually challenge Nvidia’s leadership.

Such a change in sentiment could magnify existing concerns over the sustainability of the company’s extraordinary growth.

Against this backdrop, Oki recommended paying greater attention to companies with diversified earnings streams rather than concentrating exclusively on businesses dependent on continued expansion of AI infrastructure.

He identified chemical manufacturers and electronics-related businesses with substantial revenue from non-AI operations as potentially more resilient investments.

Companies with established businesses outside AI could maintain a degree of profitability even if enthusiasm for the technology weakened significantly.

At the same time, Oki emphasized that the adoption of AI across corporate operations is likely to continue regardless of whether investment in data centers slows.

Businesses will increasingly incorporate AI into their existing systems, creating demand for software integration, information technology services and modernization of corporate infrastructure.

Cybersecurity is another area likely to attract sustained investment as businesses respond to emerging threats and the increasing complexity of digital systems.

Oki expects companies to undertake extensive upgrades to their technology infrastructure to accommodate AI applications while strengthening security.

He identified Fujitsu and other established providers of corporate information systems as potential beneficiaries of this transition.

Their experience in designing, integrating and maintaining large enterprise systems could become increasingly valuable as companies move from experimenting with AI to incorporating it into everyday business operations.

Unlike manufacturers whose earnings depend heavily on the construction of new AI data centers, such businesses may benefit from the longer-term adoption of AI across a broad range of industries.

Oki’s assessment suggests that the next stage of the AI investment cycle may favor companies capable of generating sustainable earnings from practical applications rather than those relying primarily on expectations of continued infrastructure expansion.

For Japanese equities, the immediate outlook remains uncertain as investors balance the possibility of tighter U.S. regulation, reduced data center spending, changing semiconductor demand and concerns over the leadership of major technology companies.

Although the Nikkei’s recent rebound suggests that some of the selling may have been excessive, Oki warned that investors are still attempting to determine the appropriate value of businesses operating in an industry undergoing rapid and unpredictable change.

The possibility of the Nikkei Average falling toward 50,000 remains part of the broader downside scenario, although Oki’s analysis also points to considerable recovery potential in selected stocks whose valuations have fallen below levels justified by their fundamentals.

With the future commercial structure of the AI industry still unclear, Oki expects sharp fluctuations to remain a defining feature of the market, making the ability to distinguish sustainable earnings from speculative expectations increasingly important for investors.

Source: テレ東BIZ

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