The rapid rise of generative artificial intelligence is causing a fever on Wall Street, but investors and strategists say the rush to profit from the new technology isn’t necessarily a bubble.
The rapid rise of generative artificial intelligence is causing a fever on Wall Street, but investors and strategists say the rush to profit from the new technology isn’t necessarily a bubble.
Investors are flocking to stocks of big tech companies that are expected to dominate emerging sectors, such as Nvidia, which surged 24% on Thursday. They’re funding private startups working on generative AI, systems that can conjure human-like conversations and images and generate computer code.
Investors are flocking to stocks of big tech companies that are expected to dominate emerging sectors, such as Nvidia, which surged 24% on Thursday. They’re funding private startups working on generative AI, systems that can conjure human-like conversations and images and generate computer code.
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AI app ChatGPT reached 100 million downloads in just two months. This is much faster than other popular apps like TikTok and Uber. The technology’s rapid growth has caught the attention of lawmakers in Washington, who have launched a bipartisan effort to enact new regulations.
“Investors are very interested in this area, even given the questionable economic data and challenges in the equity and bond markets,” said David Mazza, chief strategy officer at Round Hill Investments. Bet on AI-related developments.
That interest has led to the dramatic outperformance of big tech stocks. Nvidia, which makes the chips needed to power the technology, has released forecasts for sales and profits that beat Wall Street’s expectations. Thursday’s rally added nearly $200 billion to the company’s market capitalization, pushing it closer to $1 trillion.
Nvidia’s chief financial officer (CFO) Collette Kress said in a conference call with analysts on Wednesday that the strong forecast reflects “a sharp increase in demand related to generative AI and large-scale language models.” said there is.
Shares of Nvidia and Facebook parent company Metaplatform have more than doubled this year.
Microsoft, which announced a $10 billion investment in ChatGPT startup OpenAI in January, was up 39%. Apple, Google parent company Alphabet, and Amazon.com each increased more than 35%.
The S&P 500 is up 9.5% in 2023, but would likely fall for the year without the contribution of the big eight tech stocks. The tech-heavy Nasdaq Composite is up 24%, its best start since 1991, according to Dow Jones Market Data.
Andy Constant, chief executive of Dumped Spring Advisors, says those gains are at risk if the rise of AI fails to boost productivity over the long term. “The economy as a whole is not as strong as the stock market suggests, so I worry about valuations.”
Nvidia’s stock trades at 49 times future earnings estimates, while Microsoft and Meta trade at 31 and 20 times, respectively. The S&P 500 has a multiple of 18.9, according to FactSet, above the 10-year average of 17.6.
But some are reassured that the gains are mostly focused on established blue-chip stocks, rather than riskier start-ups with no other established lines of business.
“These stocks offer a healthy balance sheet, solid earnings growth, broadly reasonable valuations and AI kickers,” said Christopher Harvey, head of equity strategy at Wells Fargo Securities. That’s it,’ he said.
The initial public offering market has been largely dormant so far this year, continuing a trend that began in 2022. Joseph Zapia, co-chief investment officer at LVW Advisors, said limited supply was fueling the rally in blue chip stocks.
“There just isn’t enough market capitalization to support the buying interest in artificial intelligence,” he said.
With the push for AI regulation, the bubbling in this sector could be a dull roar. In congressional testimony earlier this month, OpenAI founder Sam Altman warned that the technology “could go quite the wrong way,” and warned that the proliferation of AI could ultimately lead to job losses. There is growing concern that
“Washington already has a very critical eye. This technology has shocked a lot of voters,” said Nicholas Boonsak, president of Strategas Securities.
Zappier added that interest from retail investors had not reached enough to suggest a bubble was forming, based on the volume of calls he received from clients.
“If I were to refer to past crazes, it would be no different than two years ago when people were asking me, ‘Which coin should I buy?’ Crypto craze is on a whole other level. I did,” he said.
