Current Status of US Stock Earnings Calls: Discussion on "AI Risks" Doubles, Companies Must "Prove Their Innocence," Investors "Sell First, Ask Questions Later"

Despite strong corporate earnings growth, management and investors have completely shifted their focus to another dimension during the current earnings season: the threats posed by artificial intelligence (AI).

On February 15, an analysis of earnings call transcripts by Bloomberg revealed that the frequency with which management mentioned "AI disruption" during calls nearly doubled compared to the previous quarter. Although this technology has not yet significantly lowered earnings expectations, investors are unwilling to wait for validation and are choosing to directly sell off any stocks deemed at risk.

Last week, commercial real estate giant CBRE Group Inc. reported better-than-expected earnings. However, after its CEO stated during the subsequent analyst call that "AI could reduce demand for office space in the long term," the stock faced a 20% sell-off within two days.

Roberto Scholtes, head of strategy at Singular Bank, stated: "As usual, the market shoots first and asks questions later." He pointed out, "Investors have decided to shift the burden of proof onto companies, which will continue to be battered until they can definitively prove they will be winners, so no one is in a hurry to jump into these murky waters."

Strong Performance Cannot Overcome AI Panic

Despite the rampant AI threat narrative, the fundamentals show that corporate growth momentum remains strong. Industry research indicates that S&P 500 constituent companies' fourth-quarter earnings grew 12% year-over-year, surpassing the initial earnings season expectation of 8.4%. More than 75% of companies reported positive surprises, a figure above the historical average.

However, market performance has stagnated. Since early September, the S&P 500 index has oscillated between 6,500 and nearly 7,000 points. Initially, investors were concerned about excessive spending by large tech companies on AI; now, the worry has shifted to the potential threat this technology poses to the earnings of other companies.

"If it's digital, it's vulnerable"

Over the past year, global investors have been sifting through potential AI winners and losers. Media, software, and human resources stocks are viewed as the industries most likely to be hit and have already been affected first. This trend has spread to broader sectors, including finance, professional services, and even logistics companies, especially in the past week.

In contrast, the Asian benchmark index reached a historic high last week, primarily driven by strong performances from heavyweight stocks like Taiwan Semiconductor Manufacturing Co. (TSMC) and SK Hynix Inc., which provide the "pick and shovel" (hardware infrastructure) for AI.

A basket of stocks compiled by UBS Group AG that are affected by AI risks has plummeted by 40% to 50% over the past year. In the U.S., these stocks include Salesforce Inc., Unity Software Inc., and ServiceNow Inc.; In Europe, this includes London Stock Exchange Group Plc, WPP Plc, Wolters Kluwer NV, and Capgemini SE.

Jean-Edwin Rhea, a fund manager at Sunny Asset Management, stated: “The trend is clear: if it is digital, it is vulnerable. From the perspective of the stock market, the physical world offers more near-term certainty than the digital space.”

Facing pressure, corporate executives attempted last week to emphasize the benefits brought by AI rather than the threats it poses. For example, travel company Expedia Group Inc. talked about how it utilizes AI to build products; UK company RELX Plc, which owns the LexisNexis legal and news database, stated that it has provided tools to help clients extract and analyze information; data company Zillow Group Inc. claimed that its residential real estate market, due to its highly localized nature, is difficult to be disrupted by AI.

Although many Wall Street analysts believe the sell-off has been excessive and some stocks have rebounded this month, market sentiment remains fragile.

Short Sellers Make Big Bets

Despite some views that the market reaction has been excessive, short sellers are eyeing these companies, especially in the European market. UBS has compiled a basket of European stocks most at risk of disruption by AI, where short interest has surged.

Data from S&P Global Market Intelligence shows that as a measure of short interest, the average percentage of borrowed shares in this basket has jumped from about 2% two years ago to over 5%. Stocks with a borrow rate exceeding 5% include Randstad NV, Ubisoft Entertainment SA, Adecco Group AG, WPP, and Hays Plc. This basket has plummeted 40% over the past year, while the benchmark Stoxx Europe 600 index has risen nearly 12%.

Mark Hiley, founder of stock research firm The Analyst, stated: “Short sellers are flocking to this theme because the narrative is very strong. Due to the speed of change, not only could business models be affected almost immediately, but the future profitability of companies also becomes extremely uncertain.”

Big Tech's Capital Expenditure Frenzy Continues

Even as investors have accounted for the disruptive impact of AI, the so-called "Hyperscalers" show no signs of slowing down their spending on building large data centers.

According to a team led by strategist Savita Subramanian at Bank of America Corp., capital expenditures by the five major tech giants—Amazon, Google, Meta, Microsoft, and Oracle—are expected to grow by 72% in 2025, with a further surge of 63% anticipated this year Subramanian's colleague Michael Hartnett wrote that after experiencing last week's "wildfire-like AI disruption," the most obvious catalyst for the cooling sell-off will be an announcement from one of the hyperscale computing companies regarding a reduction in capital expenditures.

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