The business of AI is facing 4 harsh realities

Investors were confronted this past week with four difficult realities that may fundamentally change the way they think about AI the business vs. AI the technology:

1. 💰 AI is too expensive, say CEOs and even Microsoft itself.
2. 🗑️ It's not paying off nearly as much as companies expected, per a new Bain study.
3. ⛅️ Infrastructure demand is strong — but not as strong as the most optimistic wanted, as Broadcom showed with its "weak" forecast.
4. 🏦 Financing that infrastructure is going to be more expensive for longer, with signs pointing to the Fed raising, not lowering, interest rates.

Why it matters: Those realities challenge assumptions that powered markets to historic heights over the past few years. It's hard to justify chip or memory stocks rising 1,000%+ in a year if the boom isn't what everyone assumed.

The big picture: The costs of AI are now. The profits are later — maybe.

• That "maybe" is what's making people nervous.
• AI the technology has a bright future. But AI the business is starting to look like a bottomless pit — especially amid news that even some of the world's biggest companies are rushing to sell historic (and dilutive) amounts of stock to justify their expansion.

By the numbers: The market sold off Friday amid those jitters, with the tech-laden Nasdaq having its worst day in 14 months.

• Broadcom's tepid outlook wiped $444 billion off its market cap alone in just two days.

Friction point: Tech selling off weighs down everything else.

• As charts expert Matt Cerminaro (a.k.a. "Chart Kid Matt") noted Friday, the S&P 500 was down more than 2%, even though the majority of stocks in the index were actually up on the day.
• The last time that happened? April 12, 2000, as the dot-com bubble was collapsing.

Annex Wealth Management chief economic strategist Brian Jacobsen wrote Friday morning: "Recent earnings reactions suggest that even outstanding growth isn't always enough when expectations are stretched — a classic 'priced for perfection' dynamic."

• "But not everything is priced that way," he added. "There are still areas where expectations are more reasonable, and valuations offer a cushion."

What's next: It's not clear if Friday was signal or noise, but we'll know soon.

• Asian stock markets will open Sunday evening U.S. time and should quickly reflect whether investors are feeling panicked or opportunistic.
• Then there's the not-so-small matter of the SpaceX IPO, the largest in history, expected this week. Early signs that the offering is oversubscribed suggest there could be a clamor for the stock when it hits the market.

The bottom line: Every great new technology has its moment where the business behind it resets, even as the tech itself keeps advancing. We could be seeing the start of that moment for AI.