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European Investors Demand AI Results by 2025 or Risk Losing Patience

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European investors, while optimistic about the potential of generative AI to boost productivity and profits, are growing impatient with companies that have yet to show tangible returns on their significant investments in the technology. Many are becoming more selective, shifting focus from hardware suppliers to firms that are adopting AI solutions, such as RELX and SAP. However, the pressure is mounting for these adopters to demonstrate clear financial gains from their AI investments by next year.

The AI Boom and Shifting Investor Preferences

AI-exposed stocks, which had enjoyed a surge of interest, have been under pressure recently, particularly due to fears of a recession and the rise of low-cost Chinese AI models, such as DeepSeek. Despite the broader market challenges, Nvidia, a key player in the AI space, has seen a 29% increase in its stock price year-over-year, even amid the rollout of DeepSeek, which reduces reliance on expensive chips like Nvidia’s.

In Europe, the trend is evident as investors move away from hardware makers, with stocks like ASM International and BE Semiconductor down 25% and 20%, respectively, since the January sell-off. On the other hand, companies adopting AI, such as LSEG and SAP, have shown more resilience, with only modest declines in their stock prices.

Investor Patience Running Thin

Despite the growing interest in AI, an internal survey by Fidelity in January revealed that 72% of analysts did not expect AI to significantly impact the profitability of the companies they cover by 2025. Many European portfolio managers are adopting a shorter timeframe, warning that companies need to start delivering visible results by 2026 to justify their AI investments.

Steve Wreford, lead portfolio manager at Lazard Asset Management, emphasized that investors will be more forgiving of AI adopters in 2025, when many companies are still in the beta testing phase. However, by 2026, these companies must show a significant impact on their revenues, or investors will begin to lose patience.

The Risk of Overhyped Expectations

The current high valuations of AI-exposed stocks, including SAP and LSEG, which trade at significantly higher price-to-earnings multiples compared to the broader market, only add to the pressure. Analysts like Bernie Ahkong of UBS O’Connor warn that investors will begin questioning these premiums if substantial returns are not seen by the end of 2025.

One of the key concerns in AI investments, as noted by Paddy Flood of Schroders, is whether viable, profitable use cases for AI will emerge. To sustain investment in the sector, concrete applications of AI must be developed—whether in the form of a single “killer” use case or multiple impactful ones. Fabio di Giansante of Amundi, Europe’s largest asset manager, echoed this sentiment, stressing that AI companies need to demonstrate real benefits in terms of top-line growth and margin improvement.

Looking Ahead

With AI stocks trading at premium valuations, 2025 could be a pivotal year. If companies fail to show a tangible impact from their AI investments, it could prompt a reassessment of their valuations. As the market waits for concrete results, the pressure is on AI adopters to deliver on the high expectations that have been set.

U.S. Jobless Claims Drop, Easing Recession Fears

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The number of Americans filing for unemployment benefits dropped more than expected last week, calming fears of a rapidly deteriorating labor market and reinforcing a narrative of gradual economic softening. The Labor Department reported a decrease of 17,000 claims, bringing the total to a seasonally adjusted 233,000 for the week ending August 3rd, marking the largest decline in 11 months. Economists had anticipated 240,000 claims, making the actual figure a welcome surprise after last week’s sharp increase.

This decline is likely influenced by the waning impact of temporary motor vehicle plant shutdowns and Hurricane Beryl, which had previously inflated the jobless claims figures. The revised figure for the prior week was adjusted slightly upward to 250,000.

The positive data bolstered U.S. stock markets, with major indexes rising and benchmark Treasury yields climbing back above 4%. The U.S. dollar also strengthened against a basket of currencies, reflecting renewed investor confidence. Marc Chandler, Chief Market Strategist at Bannockburn Global Forex, remarked that concerns of an imminent recession now seem “wide of the mark.”

Investors reacted by reducing bets that the Federal Reserve would implement a significant 50-basis-point rate cut next month, with the probability falling to 58% from 70% prior to the report. Despite a recent upward trend in claims since June, partly due to auto plant retooling and weather disruptions, layoffs remain low. This suggests that the labor market is stabilizing, albeit at a slower pace, as the economy adjusts to the Federal Reserve’s rate hikes in 2022 and 2023.

The Fed, which left its benchmark interest rate unchanged at its last meeting, is closely monitoring the labor market for signs of stress. While the recent nonfarm payrolls report indicated a slowdown in job gains and a rise in unemployment to 4.3%, the overall labor force growth has kept pace with the gradual rise in jobless claims, maintaining stability.

In other economic news, U.S. wholesale inventories increased in June, contributing positively to economic growth in the second quarter. The Commerce Department reported a 0.2% rise in inventories, in line with expectations, and a continuation of growth after a similar increase in May. This, coupled with a slight decrease in the U.S. 30-year mortgage rate to 6.47%, provided further relief in the housing market, which has been struggling under high interest rates.

 

Magnificent Seven Set to Shed $1 Trillion in Value, Led by Apple and Nvidia

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Apple (AAPL.O) and Nvidia (NVDA.O) led a sharp sell-off in technology stocks on Monday, fueled by U.S. recession fears and Berkshire Hathaway’s (BRKa.N) decision to reduce its stake in Apple, disrupting a prolonged rally in the sector. High-performing stocks such as Alphabet (GOOGL.O), Amazon (AMZN.O), Meta Platforms (META.O), Microsoft (MSFT.O), and Tesla (TSLA.O) fell up to 12.2% in premarket trading. The losses in the “Magnificent Seven” stocks were set to erase nearly $1 trillion from their combined market value.

Chip stocks, which have been top performers in the AI boom, also tumbled. Advanced Micro Devices (AMD.O), Intel (INTC.O), Super Micro Computer (SMCI.O), and Broadcom (AVGO.O) fell as much as 10.3%. The sell-off followed a weak U.S. payrolls report on Friday, prompting investors to seek safer assets and anticipate Federal Reserve interest rate cuts to support growth.

Warren Buffett’s Berkshire Hathaway announced over the weekend that it had halved its stake in Apple, raising concerns about the tech industry’s outlook. Nvidia shares were also impacted by reports of a potential three-month delay in the launch of its upcoming AI chips due to design flaws, affecting customers such as Meta, Alphabet’s Google, and Microsoft.

Big technology stocks, which had driven Wall Street gains for over a year, have faced pressure recently due to signs that returns from significant AI investments might take longer to materialize. Shares of Amazon, Microsoft, and Alphabet, the three largest cloud-computing providers, fell after their earnings reports failed to meet high expectations of rapid growth from AI investments.

“Expectations have arguably become too high for the so-called Magnificent Seven group of companies. Their success has made them untouchable in the eyes of investors and when they fall short of greatness, out come the knives,” said Dan Coatsworth, investment analyst at AJ Bell.