AI trade cooled off. Jim Cramer gives a timeline

Wall Street’s love affair with the artificial intelligence trade — a major driver of the market’s gains in recent years — has encountered a rough patch this fall. And on Tuesday, CNBC’s Jim Cramer said more declines in AI stocks could be on the way.

In examining what has resulted in the red-hot AI trade turning cold, Cramer said the seeds of the market’s concerns were planted in September around Oracle’s earnings report, and they only mounted from there as enormous spending commitments on AI infrastructure — especially from ChatGPT maker OpenAI — snowballed.

“You know I’m still a believer in artificial intelligence,” he said. “I do think we should experience more turbulence before we reach the promised land, and even a big shakeout if OpenAI is truly worse than we think.”

With Oracle, investors in September had initially cheered its massive growth in cloud-computing backlog with a 36% stock gain in a single day. But media reports soon indicated that the vast majority of those future commitments are tied to a single customer in OpenAI. As Oracle turned to the debt markets to help pay for its construction of AI infrastructure and OpenAI announced a slew of other agreements with other tech players, Cramer said investors started to show signs of uneasiness.

The software company’s leadership change, announced on Sept. 22, has since come under the microscope, Cramer continued. He cited a recent Financial Times piece that suggested former CEO Safra Catz left her role after putting up opposition to the company’s spending plans, adding that Catz also cashed out about $2.5 billion of Oracle stock options this year. Cramer noted Oracle’s credit default swaps — the cost of insurance on Oracle’s bonds — have more than doubled in the past two months.

Another big shift in sentiment around the AI trade came toward the end of October, Cramer said, when outfits like Meta and Microsoft reported earnings and said they were continuing to spend big on AI. This time, their stocks fell in response, another sign the market was no longer greeting all AI outlays with open arms.

But ultimately, the massive spending commitments from OpenAI in September and October “seem to have pushed Wall Street over the edge,” he continued, as investors fear the company will not be able to pay the more than $1.4 trillion it has promised to put out.

Even more worrisome were comments from OpenAI CFO Sarah Friar, who earlier this month suggested her company could use a backstop from the federal government, Cramer suggested. While Friar later clarified that OpenAI was not currently seeking a government bailout, the comments invited more scrutiny of the outfit’s finances over the past few weeks, he continued.

While Cramer is wary of getting too negative — suggesting AI darling Nvidia could “turn things around with a blowout quarter” on Wednesday evening when it reports earnings — he said in general, he feels “the need to for some more assurances on OpenAI’s finances, that’s the one I’m worried about.”

“Otherwise, the whole AI edifice feels a little more precarious than it did just even a few weeks ago,” he continued.

Sign up now for the CNBC Investing Club to follow Jim Cramer’s every move in the market.

Disclaimer The CNBC Investing Clubs holds shares of Nvidia, Meta and Microsoft.