The new AI stock trade is dumping any company in its crosshairs

NEW YORK – On Wall Street, rising fears about artificial intelligence (AI) keep pummelling the shares of companies at risk of being caught on the wrong side of it all, from small software companies to big wealth management firms. 

The latest sell-off erupted on Feb 10 when a tax strategy tool rolled out by a little-known start-up, Altruist, sent the shares of Charles Schwab, Raymond James Financial and LPL Financial Holdings down by 7 per cent or more. 

It was the deepest slide for some of those stocks since the market’s trade war meltdown in April. But it was only the most recent example of a sell-first, ask-questions-later mentality that has rapidly taken hold as the hundreds of billions of dollars poured into AI is starting to turn into commercial products – and sowing anxiety about how it could upend entire industries. 

“Every company with any sort of potential disruption risk is getting sold indiscriminately,” said Mr John Belton, a money manager at Gabelli Funds.

The advances in AI have been at the forefront of Wall Street over the past few years, with tech stocks leading the charge. As the rally pushed stocks to record highs, questions persisted about whether it was a bubble about to burst – or would set off a productivity boom that would remake corporate America. 

But since early last week, a trickle of AI product roll-outs triggered a stark sea change. Instead of focusing on picking the winners, investors instead are quickly trying to avoid getting caught owning any company with the slightest risk of being displaced. 

“I have no idea what’s next,” said Mr Will Rhind, the chief executive of GraniteShares Advisors. 

“The story from last year was we all believe in AI – but we’re searching for the use case,” he said. “And when we keep discovering the use cases that seemingly are more and more powerful, and more and more compelling, it’s now leading to disruption.”

The software industry has been dogged by worries about AI for some time. This started shifting more broadly to other sectors last week, when a new tool from Anthropic sparked a deep rout in stocks across the software, financial services, asset management and legal service sectors.

The same fears hammered shares of US insurance brokers on Feb 9 after the online marketplace Insurify unveiled a new application that uses ChatGPT to compare auto insurance rates.

On Feb 10, wealth management stocks were the next casualty, pulled down by Altruist’s product, Hazel, which helps financial advisers personalise strategies for clients. 

Altruist CEO Jason Wenk said even he was surprised by the scale of the stock market’s reaction, which wiped billions of dollars off the market values of a number of investment firms. But he said it sends a strong signal about the competitive threat posed by his company.

“It’s dawning on people – this architecture we’re using to build Hazel, it can replace any job in wealth management,” he said in an interview. “Usually these are jobs done by entire teams. And they’ll be done with AI effectively for US$100 (S$126) a month.”

AI companies like OpenAI and Anthropic have made solid inroads into software engineering with products that help developers streamline the process of writing and debugging code, and are moving into other industries. 

Yet there are plenty of questions about how the technology will be adopted. The banking industry, for one, has seen periodic challenges from crypto, electronic services and other technology that ultimately have done little to chip away at its dominance.

Mr Belton, the fund manager with Gabelli, is among those who are sceptical of how Wall Street has gone from worrying about an AI bubble to fears that it is poised to disrupt huge segments of the economy. 

“There’s going to be winners and losers in every industry,” Mr Belton said. But, he added, “one rule of thumb is tech disruption tends to take longer than expected to play out”.

The pullbacks may also reflect the general anxiety about how much stocks have rallied over the past few years on the back of the AI spending boom and a surprisingly resilient US economy. That has stretched valuations and made investors sensitive to fears of a reversal.

“If they just give a whiff of something that the market perceives as being somewhat negative, the stock’s going to sell off 10 per cent in a way that would never happen in a market that was not trading at this level,” said GraniteShares’ Mr Rhind.

To Mr Ross Gerber, the CEO of wealth management firm Gerber Kawasaki, the angst about AI losers that has been battering parts of the market for the past week is premature. He said it is still far too early to say what exactly the fallout will be.

“We can try to extrapolate out what the world will look like in five years with AI, but we just don’t know,” he said. “Markets are trying to make these calls on it when we’re still in the beginning of this infancy.” BLOOMBERG