Prediction: Investors Rotating Out of Artificial Intelligence (AI) Stocks Made a Costly Mistake. The Nasdaq Proves It.

Over the past three years, artificial intelligence (AI) stocks have been the engine driving the stock market higher. Of course, many stocks across industries also gained, but AI stocks offered the biggest push. And for a good reason: AI has the potential to be the next major game-changing development in the world of technology, and this suggests that companies active in this area could score a big win — in some cases, as soon as right now, and in many cases, down the road.

But in recent weeks, a new trend took shape: Some investors rotated out of AI stocks and into other areas. This happened amid various concerns, some directly related to AI and others related to the overall economic situation. For example, investors questioned whether the AI spending cycle would continue at the current pace or lose momentum. And they also worried about the conflict in Iran and its potential impact on the global economy.

This prompted them to shift away from high-growth stocks, such as AI companies, and toward “safer” investments, such as pharma stocks or dividend players. I love the idea of diversification — and increasing this in a portfolio is very wise, as it can shield that portfolio from the worst in times of trouble. Still, my prediction is that investors rotating out of AI stocks made a costly mistake. And the Nasdaq proves it.

Early AI winners

So, first, let’s dig a bit deeper into what’s happened in the AI arena in recent years — and as the tide turned earlier this year. As mentioned, investors piled into AI stocks over the past three years as the potential of this technology became increasingly evident. Companies designing or manufacturing chips that fuel an early and key AI task — the training of models — were early winners. Here, I’m talking about names like Nvidia and Taiwan Semiconductor Manufacturing.

Cloud companies, which offer access to AI products and services, have also been among the first to monetize AI. For example, Amazon, owner of Amazon Web Services (AWS), has said that as soon as it makes new capacity available, it’s able to monetize it.

Demand for capacity has skyrocketed, and to serve it, companies are going all in — for example, tech giants aim to spend nearly $700 billion this year on the build-out.

All of this buoyed AI stocks — until investors began worrying about the high valuations of certain players and questioned whether the revenue opportunities justified current levels of spending. Meanwhile, conflict in Iran intensified. And these elements all weighed on demand for growth stocks.

The Nasdaq’s winning streak

But in recent days, amid optimism about potential negotiations between the U.S. and Iran, the Nasdaq rebounded. In fact, on April 17, it completed a 13-day winning streak, its longest since 1992. That gave the index a 5.2% gain for the year through that date.

In the near term, it’s clear that the shift out of AI stocks may have been costly for some due to this rebound. But my prediction has to do with the long term. Stocks and indexes may traverse periods of volatility and good and bad times, but over a period of five years or more, the Nasdaq has shown us one thing in particular. A look at the chart below shows the Nasdaq’s performance over the past 20 years, and though declines have occurred here and there, the index has always rebounded and gone on to advance — reaching new highs along the way.

^IXIC data by YCharts

A historical trend

In fact, over that time period, the index has climbed 1,000%. Considering the Nasdaq’s heavy weighting in tech stocks, it’s clear that quality tech players have driven this performance. This, along with the recent rebound of the Nasdaq, suggests that quality tech stocks — and, in this case, many involved in AI — may follow this historical trend and gain over the long term.

It’s important to note that demand for AI continues at a high level, and as companies and individuals now begin to apply AI to real-world situations, this demand should continue growing. Chips, networking equipment, memory, cloud services, and other elements are key to the use of AI — creating massive long-term revenue opportunities for companies in these areas.

All of this, along with the Nasdaq’s recent and historical performance, supports my prediction that investors rotating out of AI are making a costly mistake.