AI Threat Looms: Earnings Growth Overshadowed

Corporate earnings are showing robust growth this quarter, yet market attention is dominated by the potential disruption from artificial intelligence. Investor concerns are escalating, with mentions of AI on management calls nearly doubling compared to the previous quarter. This anxiety is leading to significant stock selloffs for companies perceived as vulnerable to AI advancements.

While S&P 500 earnings are up 12% year-over-year, surpassing initial expectations, market indices have seen limited movement. Investors are increasingly wary of the digital space, with stocks at risk from AI plunging 40% to 50% over the past year. Companies in media, software, and staffing have been particularly affected, with the trend now broadening to financial and logistics sectors.

Conversely, companies providing the infrastructure for AI, such as Taiwan Semiconductor Manufacturing Co., are setting record highs in Asian markets. Some analysts believe the selloff has been overdone, leading to a rebound in certain stocks this month. Despite this, short interest is surging in European companies most exposed to AI disruption, reflecting a powerful narrative of potential immediate business model impacts.

The substantial capital spending by major tech companies, known as hyperscalers, on data centers to power AI tools continues unabated. This spending increased by 72% in 2025 and is projected to soar another 63% this year. A significant cut in this capital expenditure by a hyperscaler would be a primary catalyst to cool the current AI-driven market selloff.