Key Takeaways:
The recent surge in US artificial intelligence stocks has moved beyond institutional short covering and is now primarily fueled by retail investor fear of missing out, a dynamic that could spread to Asian markets like South Korea.
"The driving force has transitioned from a short squeeze to a FOMO-driven rally from retail investors," a market analyst noted, highlighting a shift in market sentiment that could lead to more volatile price swings.
The rally has seen significant gains in tech giants, with Amazon's stock benefiting from its strong position in cloud computing and AI. The company's Amazon Web Services (AWS) division, a high-margin business, saw revenues jump 20 percent to $128.7 billion in 2025, while its custom AI chips, Trainium and Graviton, now have a combined annual revenue run rate of over $10 billion. This has prompted bullish calls from major banks like JPMorgan and Citi on related international indices like South Korea's KOSPI, according to recent reports.
However, the sustainability of this rally is in question. The shift to retail FOMO could fuel further, potentially unsustainable, price increases. There are concerns that, similar to other market cycles, the gush of new money could be drying up. As noted in an analysis of the Indian stock market, which has been a laggard for two years, once domestic and retail investors' enthusiasm is sapped by negative returns, the fuel for the rally disappears. The analysis pointed to a lack of new profitability drivers and weakening macroeconomic fundamentals as key reasons for the market's pause.
The initial phase of the AI stock rally was characterized by a short squeeze, where investors who had bet against the stocks were forced to buy them back as prices rose, further fueling the rally. Now, the momentum has shifted to retail investors, who are piling in for fear of missing out on further gains. This type of market action, while powerful in the short term, can lead to bubbles if not supported by underlying fundamentals.
The FOMO sentiment is not contained to the US. There are increasing signs that the rally could be spilling over into international markets. Investment banks are turning bullish on indices like the South Korean KOSPI, anticipating that local tech and AI stocks will see sympathetic rallies. This highlights the interconnectedness of global markets, where sentiment in one region can quickly impact others.
Despite the current bullishness, there are significant risks on the horizon. The primary drivers of stock market growth – growing corporate profitability and fresh inflows of capital – may be showing signs of exhaustion. Many of the companies caught up in the rally are in mature, low-margin industries, and even the high-flying tech companies are facing increased competition and pressure on profit margins.
Furthermore, the macroeconomic picture is becoming less conducive to a sustained rally. Factors such as high inflation, rising interest rates, and geopolitical instability could all serve to dampen investor enthusiasm. A recent analysis of the Indian market noted that a weak macroeconomic story, including currency depreciation and fiscal deficits, was a major factor in its poor performance. These same headwinds could eventually impact the current AI rally. Investors should be prepared for the possibility of low or no returns if these risks materialize, potentially leading to a multi-year pause in the market.
This article is for informational purposes only and does not constitute investment advice.
