An AI Recalibration?

Marc Zabicki (00:00):

Markets have experienced a sharp increase in volatility over the past several trading sessions with technology and AI-related stocks at the center of some of the selling pressure. In this latest edition of LPL Street View, we will take a brief look at what has been driving the recent market volatility, why questions surrounding the massive AI investment cycle have suddenly become more important, and what the change in congressional leadership could mean for the AI story and investor portfolios. First off, let's talk about what is going on. To put it simply, investors have begun asking a more fundamental question about the AI investment boom: How much capital will ultimately be required, and when will investors begin seeing an adequate return on that capital? These are the questions and some of the concerns we raised in our midyear outlook in July. Over the last several years, investors have understandably focused on the enormous potential of artificial intelligence, but we are now moving into a different phase of the AI story.

Marc Zabicki (01:11):

The market is indeed shifting its attention for how much companies are spending on AI toward how much economic value that spending is actually producing. That distinction is an important one. The AI infrastructure buildout has required extraordinary investment across semiconductors, data centers, power generation, networking equipment, and cloud infrastructure. Capital spending remains strong, but the rate of change in spending is the variable to which this market will pay attention. That does not mean the AI investment thesis is broken, but it does mean investors are becoming more discerning about the trajectory of growth. And when expectations are high, even strong results can sometimes disappoint markets. The second issue is political. Following the midterm elections, investors are reassessing whether new congressional leadership could alter the speed of the AI infrastructure buildout. That concern is not simply about regulating artificial intelligence itself. It also involves data center permitting, energy consumption, grid capacity, environmental considerations, and local opposition to large data center projects.

Marc Zabicki (02:35):

A number of state and local ballot initiatives targeting data center development gained support during the election, adding to the concerns that the physical buildout supporting AI could face additional political and regulatory hurdles. Already, approximately $260 billion of U.S. data center investments were canceled so far this year, with roughly $130 billion canceled in the third quarter alone. Notably, the dollar value of the cancellations in the third quarter exceeded all of 2025's cancellations. While there is increased consternation about the AI buildout at the state and local level, any significant change in federal AI policy still has to move through the legislative process, but that uncertainty alone has been a reason for some pause in the minds of investors. So as investors, what should we do? From a portfolio construction perspective, we would view the recent volatility as a reminder to control position sizes, make sure you are diversified beyond the most crowded AI beneficiaries.

Marc Zabicki (03:50):

We have suggested investors should be cautiously constructive in this market, and that mantra certainly applies today. The objective for investors should not be to abandon AI, nor should it be to chase every AI-related opportunity. It should be to maintain exposure while ensuring that enthusiasm for a powerful long-term technology does not overwhelm disciplined portfolio risk management. Finally, we will continue to monitor the AI investment cycle, Washington policy developments, and market positioning and update you accordingly. Thanks for listening, and as always, allocate wisely.