The Chinese AI stock market has experienced a significant downturn, with the STAR50 index of AI and semiconductor firms dropping 40% from its peak in July. This collapse has erased approximately $480 billion in market value. Analysts attribute the decline to high valuations, tax obligations, and potential US restrictions on data center hardware imports.
Despite the correction, the STAR50 index continues to trade at roughly 100 times past earnings, which is more than three times the earnings multiple of the Nasdaq 100. According to Goldman Sachs, AI-related stocks represent 42% of China's total market capitalization and account for 57% of trading activity. Morgan Stanley forecasts a further decline of 10% to 15% for offshore Chinese stocks.
In the United States, the market impact remains more contained, with the Nasdaq index currently 6% below its record high from three weeks ago. Investors are now looking toward upcoming earnings reports from Microsoft, Alphabet, and Amazon to gauge future performance. These companies currently face high capital expenditures on data centers and chips that exceed their operational cash flow.
Microsoft has projected growth for its Azure cloud unit at 44% to 45%, while Google Cloud reported 82% growth in the previous quarter. Analysts are closely monitoring the return on invested capital for these cloud divisions. Heading into these reports, Microsoft, Alphabet, and Amazon have all underperformed compared to the 11% gain seen by the S&P 500 index this year.
