Dan Niles Warns AI Market Drawdown Echoes Internet's 1998 Cycle

While Dan Niles credits agentic AI for his belief that artificial intelligence has not yet peaked, he has been telling investors for weeks to keep plenty of cash on hand and to be cautious.

The caution comes just before earnings season opens for Microsoft, Alphabet and Amazon. Semiconductor stocks are dropping more sharply than the broader market. Over the past week, the PHLX Semiconductor Index (SOX) declined 3.2%, compared to 0.5% for the S&P 500.

Dan Niles Sees Reasons for Cash and Caution, Yet Stops Short of Calling a Peak

According to Niles, agentic AI consumes ten to one hundred times the tokens of inference. He likens today's repricing to the internet drawdowns of 1997 and 1998, market moves that led into a subsequent rally.

“In summary, because of the advent of Agentic, I do not believe this is THE TOP,” he said.

Niles identifies two areas of market repricing. Capital is becoming costlier across debt and equity markets, while expansion at pure-play AI companies is decelerating.

He points to CoreWeave to illustrate the debt-market trend. The firm issued $1.25 billion of unsecured 2032 notes in June, carrying a 9.625% coupon, and those instruments have been yielding roughly 15% of late. CoreWeave's stock had lost 36% of its value since October 1 as of the week just ended.

Since CoreWeave supplies computing capacity to Microsoft and Meta, its financing difficulties lie directly within the AI supply chain of big technology firms.

Regarding decelerating momentum, Niles notes that Anthropic saw its quarter-over-quarter revenue expansion drop to 45% in Q3 from 145% in Q2.

Data Center Resistance Casts a Shadow Over Big Tech's Earnings Week

Niles also highlights a political danger on top of the financing and growth issues. He observes that both Republicans and Democrats appear in accord over data center moratoriums, a stance that might become more pronounced after the midterm elections. His concern is that such constraints could damage cloud growth forecasts for the fourth quarter.

The speed with which political risk can impact a stock valuation is visible in Australia's NextDC. Its share price plunged 39.5% on October 21, following a reduction in guidance caused by power delays linked to local resistance.

In the United States, Amazon abandoned its proposal for four data center structures as part of a $427 million campus in Virginia's Loudoun County. Data Center Watch reports that opposition stalled or halted American projects valued at $68 billion from April to June.

Microsoft and Alphabet will issue their numbers following the closing bell on October 28, just after the Federal Reserve announces its interest-rate call. Amazon's report lands the next day. Niles anticipates that share-price reactions will depend on the companies' remarks concerning capital expenditure, spending, cash flow, and financing requirements.

“I worry whether a datacenter moratorium causes an issue with cloud growth guidance for the December quarter despite very strong growth in the September quarter,” he added.

Not everyone interprets the cycle in the same fashion. Arthur Hayes, the former chief executive of BitMEX, foresees an AI buildout that concludes in a bust, while Fundstrat's Tom Lee argues that the selloff in AI is close to ending. The market's reaction to this round of earnings and financing discussion could reveal which assessment proves accurate.