Broadcom, a US supplier of chips and network technology that is underpinning the global artificial intelligence boom, missed revenue expectations last week. Not much.
On Monday, South Korea’s stock market had fallen more than 8%, Samsung Electronics had lost 10%, SK Hynix almost 8%, Taiwan’s market had been hit, Japanese semiconductor stocks were under pressure and roughly $1.8 trillion had been wiped off the value of the S&P 500.
Savvy investors should pay close attention to that chain of events.
Not because it says something alarming about AI, but because it says something alarming about investors.
Broadcom’s results were disappointing. They were not catastrophic. The company did not report a collapse in demand. It didn’t tell the market that AI spending was drying up, and it didn’t suggest that data center investment was slowing significantly.
However, the reaction was brutal.
In my view, the sale exposed something that has been building for months beneath the surface of the AI rally: complacency.
The market is so used to positive surprises from AI-related companies that even a relatively modest disappointment now triggers a huge response across continents.
This is rarely a healthy sign.
The dominant explanation for the sell-off is that tech stocks had expanded and investors were taking profits. There is some truth in this.
But profit-taking doesn’t explain why a small loss of earnings from a US company was able to knock more than 8% off South Korea’s stock market.
Complacency yes.
For two years, investors have treated artificial intelligence as the closest thing markets have to a guaranteed growth story. The trade has been extremely successful. Companies exposed to AI infrastructure have delivered tremendous revenue growth. Capital expenditure has increased. Demand has consistently exceeded forecasts.
The market gradually conditioned itself on a result.
More spending, more growth and more positive surprises.
Each quarter reinforced the same belief. Investors who bought the story were rewarded. Doubting investors were punished.
Ultimately, this creates a dangerous mindset.
The focus shifts away from risk and towards confirmation. Investors stop asking what could go wrong and start assuming the trend will continue unabated.
That’s what I believe happened here.
Broadcom exposed how little room for disappointment remains in commerce.
South Korea provides the clearest example.
Samsung Electronics and SK Hynix now account for roughly 40% of KOSPI. Both companies have become major beneficiaries of the AI infrastructure boom. Investors around the world see them as direct ways to gain exposure to the growing demand for advanced memory chips.
The same dynamic exists in Taiwan through TSMC. It exists in Japan through semiconductor device manufacturers such as Tokyo Electron and Advantest.
As a result, a relatively modest earnings disappointment in the United States quickly became a reassessment of some of Asia’s biggest and most influential companies.
This should worry investors for one simple reason.
Nothing material has changed in South Korea, Taiwan or Japan.
What changed was the feeling.
A company headquartered thousands of miles away reported results that failed to please a market accustomed to constant positive surprises, and investors immediately took a swipe at some of Asia’s most important stocks.
As such, this isn’t a sign of a poor AI story, it’s a sign of a market that may have gotten too comfortable with a single narrative.
The irony is that the long-term case for artificial intelligence remains extremely strong. Businesses continue to invest heavily. Governments continue to invest heavily. The demand for computing power continues to grow.
Of course, I remain positive about the long-term outlook. But strong themes often create their own dangers.
The stronger the narrative becomes, the more investors pile into the same positions. The more investors pile into the same positions, the more vulnerable markets become when expectations don’t match reality.
History is full of examples. The Internet changed the world and investors became still too optimistic. China transformed the global economy and investors still became too optimistic. AI may turn out to be even more important than both, and guess what. Investors are apt to make the same mistake again.
That’s why I believe this week’s sale matters. Not because Broadcom lost ratings, not even because South Korea fell 8%, and not because AI suddenly faces a problem.
The importance lies in what the reaction revealed.
A market that has spent two years rewarding optimism is beginning to rediscover disappointment. And a disappointment that the market rediscovers can be a much more powerful force than a company missing expectations for a part.
A loss of earnings in California should not be able to wipe 8% from the South Korean stock market.
The fact that he did should tell investors all they need to know about where the real risk lies right now.
Nigel Green is CEO and founder of DeVere Group.
