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buffett once said, "when the tide goes out, you see who is swimming naked." today, as the crest of the ai ​​wave gradually passes, people can't help but find that there seems to be quite a few people "swimming naked" in the technology industry.

a recent analysis of second-quarter earnings reports by industry insiders shows that enthusiasm for artificial intelligence has masked the weak performance of most technology companies. after performance slowed down since 2022, many companies are "still in recession."

over the past year and a half.nvidiaandmicrosoftthe sharp rise in the share prices of large companies expected to be early beneficiaries of artificial intelligence, such as nvidia, has helped erase the terrible memories of 2022, when the tech-dominated nasdaq composite index fell by nearly a third. however, under the surface, many technology companies that are not focused on artificial intelligence have actually been struggling to regain momentum.

tony kim, blackrock’s head of fundamental equity, said that when you look at technology areas outside of artificial intelligence, there hasn’t been a lot of progress.many (sub)sectors are still in decline. the only one that is really growing is the ai ​​sector.

beneath the surface of the ai ​​wave

for example,software, it consulting and services for the manufacturing and automotive industriesother industries that produce more traditional technology fields such as electronic equipment are still facing difficulties. the challenges they face include weak demand and the sequelae of overexpansion and inventory backlogs during the covid-19 pandemic.

some companies are even experiencing negative impacts from the ai ​​wave as clients with limited budgets redirect their investments.

dustin moskovitz, co-founder of facebook and current ceo of asana, summed up the situation of many companies last week, saying that the business software group has scaled back its earnings forecast for the second half of the year. moskovitz said, "what we are seeing in the technology sector is still a legacy of over-hiring and over-spending in the early days of the epidemic. i think it all has to do with the huge uncertainty in the economic environment. and also, how artificial intelligence will develop."

recent financial reports show that most large tech companies are growing more slowly than in the past, while many smaller ones are actively shrinking.

industry data shows that the average revenue of companies in the s&p 500 information technology index has grown by only 6.9% in the past 12 months, compared with an average growth rate of 10% in the past five years. about three-quarters of companies are growing at a rate lower than the recent average. in the past 12 months, the average earnings per share of companies in the index have grown by 16%, lower than the 21% in the past five years.

(s&p 500 information technology index)

in fact, signs of weakness in tech companies were even more pronounced in the small-cap index, as the surge in large-cap tech stocks provided little lift to smaller stocks. in the russell 2000, tech stocks were the second-worst sector in terms of revenue growth in the second quarter, with revenue down 6.1% year-over-year and profits down 2.8%, according to lseg.

ted mortonson, technology industry strategist at rw baird, said generative artificial intelligence (aigc) is masking cyclical declines in many other core industries.

even in sub-sectors such as chips that have been caught up in the enthusiasm for ai, some business lines are struggling.for example, brice hill, chief financial officer of applied materials, a traditional chip equipment supplier, said last month, "we are seeing particularly strong pull related to artificial intelligence and data center computing, but the automotive and industrial end markets are facing weakness."

john barr, portfolio manager at needham funds, also pointed out that in the industrial sector, the situation is similar everywhere. he has invested in several semiconductor companies, including applied materials. "the current growth momentum is not very good, so we are looking for companies that have stable businesses and are planning new things."

can “small wheel movement” occur?

it is worth mentioning that since the early summer, some investors' enthusiasm for ai-focused companies has faded, leading many commentators to predict that investors' attention will gradually shift from large technology stocks to areas such as financial services and industrials, which may bring some comfort to some companies in the technology industry that have struggled in the past few years.

some tech industry experts are hoping for a “mini-rotation” within the tech sector similar to the market rotation this summer — away from the biggest artificial intelligence stocks and into previously less favored corners of the industry.

and while few companies can deliver the triple-digit growth that nvidia has achieved in recent quarters, there are signs that some of the worst-performing sectors of the tech industry are indeed turning around.

“i think we’re seeing a stabilization trend: in those areas that are more sensitive to the macro economy, things are no longer getting worse, and if interest rates go down, that will help,” said tony wang, portfolio manager of the t rowe price technology fund.

“i feel like for the last two years people have been thinking that ai is the only technology worth investing in. i’m not sure that’s going to be the case in the next two years.”