"AI's new favorite" Behind Carter's Incorporated's (CAT.US) darkest 5-day price drop: AI narrative enters a period of intense volatility

Industrial giant Carter's Incorporated, known as the "AI darling" of the US stock market, has recently suffered a major setback in its AI-driven uptrend, highlighting the doubts of investors about the trillion-dollar investments in AI data centers by tech giants and questioning the sustainability of the AI investment frenzy in the US stock market. Stocks that have benefited from the AI hype this year have seen significant declines from their historic highs, indicating that the trading volatility surrounding the AI bull market may become more intense. For Carter's Incorporated, the investor favorite benefiting from the AI computing industry chain, its stock price has dropped significantly in the worst five-day period since April. Statistics show that Carter's Incorporated followed the Nasdaq 100 index on Friday, with a nearly 2% increase at the close, ending the consecutive downward trend of the "darkest five days." In the five trading days ending Thursday's US stock market close, the stock fell sharply by 9.6%, making it the weakest performing stock in the S&P 500 Machinery Index. The following chart shows that even the power equipment stocks could not escape the downturn during the market rotation, and Carter's Incorporated, along with GE Vernova and Vertiv, faced even more violent declines due to being caught up in the AI sell-off wave. "Anything related to AI suddenly underperforms the market, and Carter's Incorporated is doing the same thing," said Matt Maley, chief market strategist at Miller Tabak + Co. "The phenomenal stock market performance surrounding AI this year has helped many stocks closely related to AI computing achieve multiple expansion in valuation. Now, it is resulting in some multiple contractions and intense fluctuations." Countdown to the Burst of the AI Bubble? It has been over three years since OpenAI released the globally popular ChatGPT, sparking a global frenzy of artificial intelligence investments and global corporate AI deployment. Although funds are still pouring into leaders of the AI computing industry chain such as NVIDIA Corporation, Broadcom Inc., Alphabet Inc. Class C, Oracle Corporation, and Micron that have benefitted from the AI investment frenzy, doubts about the sustainability of this unprecedented global AI investment boom are deepening. Some investors believe that the "golden age" of this AI investment frenzy may have come to an end. Since November, top Wall Street investment firms have increasingly questioned the sustainability of this unprecedented global AI investment frenzy led by the Magnificent Seven tech giants in the US stock market, believing that a so-called "AI bubble" is forming with a comparable impact to the "Internet bubble" of the past. More importantly, these top firms are starting to bet on "major events/moments that could completely burst the bubble, which will inevitably lead to even more intense fluctuations in the future of popular AI concept stocks that have benefitted from the AI bull market narrative/AI belief". Jim Morrow, CEO of Callodine Capital Management, stated that we are at a "critical juncture" phase. "Although these stories are well told and the logic is still valid, we are now at a crucial point to verify if the investment returns are good enough." A recent report from Goldman Sachs Group, Inc. indicated that large tech companies that have invested the most funds in hopes of "winning" the AI equipment race may face highly uncertain investment returns for a considerable period of time. Goldman Sachs Group, Inc. stated that the AI story is now at the "final chapter of the prologue" that is, the end of the early stages of the AI story in the market, and the belief that most of the value created by AI will be attributed to large language models and the widespread bullish market trend of assets related to AI concepts is likely coming to an end. The market will become stricter in identifying the true beneficiaries. Why has the US industrial giant Carter's Incorporated been labeled as the "AI darling" at the trading level? Carter's Incorporated is well-known for its yellow backhoe loaders and bulldozers, but it has become an unexpected new "hot AI concept stock" and been included in the list of "AI darlings" in the market, primarily because of its relatively small-scale business in selling essential components for powering AI data centers gas turbines. This has driven its stock price up by about 60% so far this year, with lower interest rates often boosting overall construction activities in the US. The stock's valuation has risen to a peak of 28 times expected earnings, the most expensive valuation multiple since 2017. Carter's Incorporated has long been one of the world's largest traditional manufacturers of construction and mining equipment, seen as an important barometer for the health of the global economy. The company's iconic yellow mining/excavating machines are used in various industries and countries around the world, and their overall sales may indicate the strength of global industrial activities or reflect the slowing or speeding up of global economic growth. However, in recent years, Carter's Incorporated has been considered one of the big winners in the AI frenzy, mainly because this unprecedented AI craze has directly driven orders and shipments of Carter's Incorporated's power generation units, gas turbines, and energy storage devices, which have been the most dazzling growth engines for the company's performance in the third quarter. Recently, AI-related stocks as a whole have suffered major blows, with disappointments from Broadcom Inc. and Oracle Corporation in their financial prospects and the drag from market fund rotations into other sectors affecting AI. Other power equipment companies benefiting from the AI investment frenzy have also plunged along with Carter's Incorporated, including GE Vernova Inc., which focuses on AI data center power systems infrastructure, and Vertiv Holdings Co., a leader in AI data center liquid cooling. In addition to the sharp decline in chip stocks closely related to AI, companies in the power, construction, and engineering sectors that provide infrastructure construction services for AI data centers have not been spared. In the five trading days ending Thursday, the S&P 1500 Construction and Engineering group saw a significant decline of 7.8%. Carter's Incorporated still retains much of the strong performance gains from its robust earnings report in October. Bob Lang, founder of Explosive Options, a market commentary organization specializing in options, stated that as the market continues to rotate towards long-ignored value and cyclical stocks, the overall uptrend remains intact with the S&P 500 index at its core. Regarding AI concept stocks, he said, "Carter's Incorporated is now at the forefront of this field, which will only benefit them in the long run, but there will also be significant fluctuations." Analyst Sabahat Khan from RBC stated that while the AI investment theme has driven the company's strong performance so far this year, Carter's Incorporated's core business has also performed well. The analyst added, "The real risk is whether investors' strong profit expectations for the next four to five years can be met," and whether "the actual demand for AI applications and the AI investment theme will still be favorable in a few years".