Markets are facing the biggest AI reality check in months

I was expecting to start this note talking about the US jobs data, the euro area inflation update and major central bankers’ latest thoughts about inflation and where monetary policy is headed (and I will get there), but instead, I will start with Meta’s decision to develop a cloud infrastructure business to sell access to computing capacity, chips and its AI models and continue with Oracle’s warning that AI investments may not turn into profits.

So, Meta is now willing to step into the cloud business, selling computing power, chips and access to its AI models, joining Microsoft, Amazon and Google in this area.

Meta jumped nearly 9% on the news, as investors were happy to see that the massive spending that looked to be going nowhere world-changing will finally end up in a potentially profitable business, but the news sounded alarm bells in my ears more than anything else.

1. Meta has spent too much, eaten more than its stomach could take, and now needs to spit part of it out. It took debt on its shoulders along the way. It failed to release a go-to model, and it’s now moving to Plan B to make its investments worthwhile. Plan B will cost the company, so in theory, Meta is arguably in a worse place than the company itself thought it would be. I didn’t get why it rallied 9% on yet another failed business attempt.

2. Meta is certainly not alone in the camp of those who spent too much on AI infrastructure. There could be other ‘cockroaches’. If that’s the case, we could see Big Tech slow down spending, and the latter would hurt the stellar future revenue expectations for the chipmakers that have gone ballistic over the past year. This is why we saw the Korean Kospi index sink more than 5% today.