AI Stocks Hit a 'Blowoff Top': Is the Generative Tech Rally Over?
The recent brutal selloff sweeping through global technology and AI stocks has left investors questioning whether the artificial intelligence era has reached its peak. According to Jonathan Schiessl, Deputy CIO at Westminster Asset Management, while the market is undergoing a necessary correction, the underlying long-term thesis for AI remains intact.
The 'Blowoff Top' and the Necessity of Correction
The current market volatility is not entirely unexpected. Schiessl notes that key players in the semiconductor space, such as Samsung and SK Hynix, had "gone vertical," creating a highly crowded trade fueled by heavy leverage. This movement characterized a "blowoff top"—a final, frenzied surge in prices before a steep reversal.
While the unwind has been painful, Schiessl distinguishes between a market correction and a total collapse. He argues that dramatic rises in any sector are typically followed by steep pullbacks, which is standard market behavior. Crucially, he believes the fundamental driver of the trade—AI technology—has not broken down, even if the stock valuations need to cool.
Earnings Support vs. The Cost of Capital
One of the strongest arguments against a total AI bubble burst is the strength of US corporate earnings. Unlike historical bubbles driven purely by speculation, current American market valuations are being supported by "extraordinary" earnings growth. Even the "Mag-7" tech giants have valuation support, having recently underperformed compared to the rapid re-rating of memory chipmakers.
However, a structural risk looms: the global cost of capital. The massive scale of capital required for AI data centers, defense spending, and the energy transition means that interest rates and funding costs are trending upward. Schiessl warns that rising capital costs could act as a "blocker" for the intensive funding required to sustain the global data center expansion story.
India’s Unique Position: Insulation and IT Risks
Interestingly, India’s position in the global AI landscape offers a unique form of protection. Because India lacks a major domestic AI hardware or chip manufacturing sector, the Indian markets are largely insulated from the forced selling currently hitting South Korean and US tech stocks.
However, Schiessl maintains a cautious stance on the Indian IT sector. Despite a recent derating, he views the business model of traditional Indian outsourcing as being under genuine threat from AI disruption. With Indian IT trading at approximately 18 times earnings—significantly higher than comparable Chinese internet stocks at 12 times—he suggests the sector remains expensive given the poor earnings visibility over the next four to five years.
Key Takeaways
- Market Correction vs. Collapse: The current AI selloff is a "blowoff top" correction driven by over-leveraged positioning, but strong US corporate earnings suggest the underlying AI thesis is still valid.
- Capital Cost Headwinds: The rising global cost of capital poses a structural risk to the massive infrastructure and data center investments required for the AI revolution.
- India’s Mixed Outlook: India is shielded from the immediate AI hardware crash due to low direct exposure, but the Indian IT sector faces significant valuation and business model risks due to AI disruption.