The tech stock sell-off that shook Wall Street last week has prompted investors to recalibrate their approach to AI investments, as unbridled enthusiasm gives way to demands for concrete returns. According to Daniel Newman, CEO and chief analyst at Futurum Group, the downturn represents a “healthy, overdue rotation and a market demanding receipts” from companies that have poured billions into artificial intelligence development.
Software stocks bore the brunt of the sell-off, though the turbulence spread across the broader technology sector. While major indexes have since recovered most of their losses, market participants remain cautious about potential vulnerabilities in the AI trade. Newman shared a framework for identifying which AI stocks are positioned to succeed as the sector matures.
AI Spending Must Drive Tangible Revenue Growth
Investors should prioritize companies demonstrating clear returns on their AI investments, according to Newman. With hyperscalers collectively spending over $470 billion this year on AI infrastructure, the ability to translate that capital into revenue has become critical.
Newman highlighted Amazon and Microsoft as examples of firms successfully monetizing AI spending through their respective cloud platforms, AWS and Azure. These companies are showing that massive AI investments can fuel measurable business growth rather than merely inflating costs.
In-House Chip Development Offers Competitive Edge
Companies building their own silicon chips gain significant advantages in the AI race, Newman noted. Capacity constraints continue to define competition in the sector, with chip demand consistently outpacing available supply.
Amazon, Alphabet, and Microsoft are all developing custom AI chips to reduce dependence on external suppliers. Additionally, Newman emphasized that firms with in-house chip capabilities benefit from vertical integration and capacity advantages that support better profit margins over time.
Enterprise Solutions Generate Stronger Returns
Enterprise-focused AI applications have proven most successful at generating revenue, according to the analyst. Cloud hyperscalers including Alphabet, Microsoft, and Amazon have led this trend, alongside companies like Palantir that cater to business clients.
However, some software companies are also demonstrating enterprise monetization despite concerns that triggered the recent market volatility. Newman specifically mentioned ServiceNow and IBM as firms driving agentic AI workflows and token consumption for corporate customers.
Physical AI Represents Next Major Opportunity
The application of artificial intelligence to the physical world could unlock the next multi-trillion-dollar market beyond data centers, Newman suggested. Tesla CEO Elon Musk told investors on the company’s recent earnings call that its humanoid robot Optimus could eventually generate up to $10 trillion in long-term revenue.
Newman identified Amazon and Tesla as leaders bringing AI capabilities into physical applications. Meanwhile, this emerging category represents a significant expansion of AI beyond purely digital environments.
Traditional Software Models Face AI Disruption
Investors should avoid seat-based software companies that fail to evolve with AI technology, Newman warned. The market correctly focused on the software sector during the sell-off, he indicated, though AI will not necessarily replace all traditional software offerings.
Software firms controlling data for core business applications can survive, Newman explained, but they must adapt to meet enterprise demands for AI-driven productivity gains. In contrast, companies partnering with AI platforms, such as Salesforce and ServiceNow, appear better positioned for the transition.
Red Flags Include Unclear Returns and Debt Financing
As AI disruption concerns fuel ongoing market uncertainty, investors should scrutinize companies lacking a clear narrative for how capital expenditures will deliver results. Newman also cautioned that firms using debt to finance AI infrastructure buildouts carry elevated risk profiles.
While debt financing is not inherently problematic and can support critical growth initiatives, it makes stocks more vulnerable during risk-off market conditions. Newman advised investors to focus on companies with strong cash flow generation and the financial capacity to sustain AI investments with minimal risk.
Market observers expect continued volatility in AI stocks as investors separate companies with genuine revenue traction from those relying primarily on future promises. The coming earnings season will likely provide further clarity on which firms are successfully monetizing their AI investments.
