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Dan Niles argues that the artificial intelligence market has not reached its peak, a view he attributes to the emergence of agentic AI. Despite this long-term assessment, he has spent recent weeks advising investors to increase cash holdings and maintain caution. This guidance arrives days before Microsoft, Alphabet, and Amazon release their quarterly earnings reports.
The caution comes as chip stocks have declined more sharply than the broader market. The PHLX Semiconductor Index (SOX) dropped 3.2% last week, while the S&P 500 fell 0.5%. Niles compares the current market repricing to the internet drawdowns of 1997 and 1998, periods that historically preceded significant rallies.
Agentic AI and Funding Costs
Niles points to token usage as a key differentiator for the current cycle. He notes that agentic AI systems consume 10 to 100 times more tokens than standard inference models. “In summary, because of the advent of Agentic, I do not believe this is THE TOP,” he said.
However, Niles identifies two specific factors driving the current market adjustment. First, funding costs are rising in both debt and equity markets. Second, growth rates at AI-native companies are decelerating. He cites CoreWeave as a primary example of the debt market pressure. The company sold $1.25 billion in unsecured 2032 notes in June with a 9.625% coupon. Those notes have yielded approximately 15% this month. CoreWeave stock had fallen 36% since the start of October as of last week.
CoreWeave’s financial strain is significant because it rents computing power to major technology firms, including Microsoft and Meta. This places its funding challenges directly within the supply chain for Big Tech’s AI initiatives. On the growth front, Niles highlights Anthropic, whose quarterly revenue growth slowed from 145% in the second quarter to 45% in the third quarter.
Data Center Risks and Earnings Week
Beyond financial metrics, Niles flags political risk related to data center construction. He notes that both major US political parties appear to support data center moratoriums, a situation he believes could worsen following the midterm elections. Niles expressed concern that these moratoriums could negatively impact cloud growth guidance for the December quarter, despite strong performance in the September quarter.
“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. The risk is already visible in share prices. Australia’s NextDC saw its stock fall 39.5% on October 21 after power delays linked to community opposition forced a reduction in guidance.
In the United States, opposition has already disrupted large-scale projects. Amazon dropped plans for four data center buildings on a $427 million campus in Loudoun County, Virginia. According to Data Center Watch, community opposition blocked or delayed US projects worth $68 billion between April and June.
Investors will look to upcoming earnings for clarity on these pressures. Microsoft and Alphabet report earnings after the close on October 28, hours after the Federal Reserve’s rate decision. Amazon follows on October 29. Niles expects stock movements to depend heavily on management comments regarding capital expenditure, expenses, cash flow, and financing needs. Other market participants hold differing views on the cycle’s trajectory. Former BitMEX CEO Arthur Hayes expects the AI buildout to end in a crash, while Fundstrat’s Tom Lee argues the AI selloff is nearly over. This week’s financing commentary may provide evidence on which assessment holds up.
Frequently Asked Questions
Why does Dan Niles believe the AI market has not peaked?
Niles credits agentic AI for his view, noting that these systems use 10 to 100 times more tokens than standard inference models.
Which companies report earnings this week?
Microsoft and Alphabet report earnings on October 28, and Amazon reports on October 29.
