Need a reason to feel pessimistic about stocks? They’re everywhere. Inflation, a hawkish Federal Reserve, endless political strife, nosebleed valuations, a possible recession, unstable local banks—these are just the beginning. Then there is the bullish case with more or less one board. It is an early technology notorious primarily for fueling the fear of mass unemployment and possibly human conquest. Guess which side the investor is on. Investor enthusiasm for artificial intelligence alone has somehow caused a serious rally in U.S. tech stocks. Since the beginning of the year, the Nasdaq 100 index has grown in corporate value by more than $4 trillion, a particularly rapid rise in wealth, even by the standards of pandemic-era frenzy. The Nasdaq is up about 31% so far in 2023, and tech stocks contributed about 11% to the overall S&P 500. Technology-focused funds attracted a record $8.5 billion from investors in the last week of May, according to EPFR Global data compiled by strategists at Bank of America Corporation. Fear of missing an opportunity is typical of inflating a bubble. See the dotcom boom, meme stocks, and cryptocurrencies. When it comes to AI, there’s a lot of it. But there is a darker side to this anxiety. “This is not just his FOMO. My impression is FOBR, the fear of being replaced,” says Vincent Deluard, director of global macro strategy at StoneX Financial. “Basically, we’re like, ‘Oh my God, it’s my job for AI to take over the world.’ And the only way I can get around that is to own this damn robot. So, buying Nvidia is buying Microsoft. The speed at which the AI narrative changed previously dismal investor sentiment was as amazing as the bull market itself. Lauren Goodwin, an economist and portfolio strategist at New York Life Investments, says “a really big AI week” has arrived near the end of May. That’s when NVIDIA forecast sales for its AI processors to far exceed analyst expectations, pushing the market value to nearly $1 trillion, an unprecedented feat. The chipmaker’s chief executive is overhauling data centers around the world to accommodate “generative” AI applications, including ChatGPT and other tools that create new content such as text and images based on prompts. predicted. The market for generative AI itself could expand more than 40% to reach $1.3 trillion by 2032, according to Bloomberg Intelligence. “There will always be this factor in the market for myriad interesting ideas. But show me the money. Show me how this affects or disrupts workflows and business processes,” said Goodwin. says Mr. “And people can see the impact now.” The rise in AI-related stocks wiped out everything else in the market, and companies whose fortunes are more closely tied to the real economy are faring relatively poorly. sluggish. Value stocks and small business stocks will see a modest gain in 2023, suggesting persistent caution over rising interest rates and slowing economic growth. The S&P version, which weights stocks evenly rather than loading the tech stocks that investors already value the most, would be slightly better than flat in 2023. So does the Dow Jones Industrial Average, which is poised to become a representative part of it. Good American company. A normal S&P 500 rally this year would basically evaporate without the names of a few companies like Nvidia and Microsoft, which is integrating AI into its products. The fad is pushing valuations to levels that have caused investors a lot of pain in the past. His earnings-per-share cost of his Nvidia stock in the last four quarters is 185x, and the general ratio of S&P 500 companies is 19x his. The company is trading at 37 times its recent annual sales. For a typical company, a price-to-sales ratio of 3 might be enough to make an analyst pause. “If you think about it, investors flocked to tech stocks in the early 2000s, ignoring the fact that tech stocks were trading at 60 times their expected earnings,” said Sam Stovall, chief investment strategist at financial research firm CFRA. because he was doing it,” he says. “Unfortunately for those people, it took the Nasdaq five years to return to breakeven.” Of course, Internet technology changed the world after the dot-com collapse. It wasn’t always an easy way to make money. Let’s pause for a moment and consider how few investors, or most people, still really understand what his AI is and how it applies in the real world. AI bots can conduct spooky, human-like conversations, but the answers they give are still notorious for their mistakes and ‘hallucinations’ of fabricated information. “You can’t take bad results and use them for important functions,” said Art Hogan, chief market strategist at B. Riley Wealth Management. “So as much as this is going to be exciting, it could take longer than originally expected.” Focus on maturity. They are the aristocrats of America’s commercial world, not the profitless unicorns that dot the dreamscape of the bubble years of the past. In the late 1990s, companies were measured by metrics like eyeballs and clicks, but “it didn’t make sense economically,” said Chris Harvey, head of equity strategy at Wells Fargo & Wells Fargo. “But when you look at the companies that are technology leaders in AI, the balance sheets are good.” Another difference is the purchasing power of those who are considered customers of the AI boom: corporate treasurers in the US. Cash on corporate balance sheets surged during the pandemic and remains high. Cash and cash equivalents across the S&P 500 Index companies totaled $574 a share in the first quarter, according to data compiled by Bloomberg. That’s down from its peak of $659 at the end of 2021, but it’s still about 30% above its pre-pandemic Q4 2019 level. Some see that large sum of cash going toward AI projects. Capital spending on AI can go well beyond the traditional tech industry. Jennifer Chan, portfolio manager at Schaefer Cullen Capital Management, said healthcare and pharmaceutical companies are discussing using the technology to shorten research timelines. But not all companies will benefit equally from generative AI, as many companies are reluctant to make the “major changes” needed, says his AI researcher at the Massachusetts Institute of Technology. said Andrew McAfee, co-founder of the company Work Helix. “If you look at US corporate spending on digital technology, it’s steadily increasing. Our hunger for digital is bottomless,” he says. “But technology does not level the competition. You should expect to sort out the many exaggerations of the sound. “We’ve seen this before. Something gets hyped, companies start changing their names so they can insert ‘AI’ directly into their names, conference calls, corporate websites. , AI is now being mentioned in public releases,” says Kam Harvey of the financial industry. Professor at Duke University and Partner at Research Affiliates, Money Manager. “It can go up very fast and go down very quickly. This is not just a story. Just think of the history of the hype, that’s exactly what’s happening.”
