How the AI ​​explosion could save the market and possibly the economy

An Nvidia logo is seen on the company’s building at an industrial park in Tianjin, China February 7, 2019.

CGV | Visual Group China | Getty Images

A hit earnings report on Wednesday from Nvidia crystallized an important point for markets and the economy: for better or for worse, artificial intelligence is the future.

Whether it’s personalized shopping, self-driving cars, or a wide range of robotic uses for healthcare, gaming, and finance, AI will become a factor in virtually everyone’s life. .

Nvidia’s massive first-quarter fiscal profits helped quantify the phenomenon as the company closes in on an elite tech leader with $1 trillion market valuations and clear leadership status on Wall Street and in the Silicon Valley.

“AI is real, AI is not a fad, and we’re only in the early innings,” said Steve Blitz, chief US economist at TS Lombard. “Does this change the course of the economy over the next three to six months? Probably not. Does it change the economy over the next three to six years? Absolutely, and in a very interesting way.

Some of the changes planned by Blitz are the reduction in demand for foreign labor, a “point of sale” effect where coding and creative writing can be done by machines rather than people and a crowd other activities that go beyond what seems obvious now.

The development of products such as OpenAI’s ChatGPT, a chatbot that converses with the user, has helped realize the potential.

“It’s hard for me to overstate the value or impact of AI, and it aligns with my view that the next decade is about the broader application of technology beyond what we have. seen so far, beyond computers and phones, and this app has huge benefits,” Blitz said.

Isolated effects so far

At the same time, fears of an economic slowdown persisted—despite his enthusiasm for AI, Blitz still believes the United States is headed for recession—and the lopsided market reaction recalled a stratified economy in which technological advantages tend to spread slowly.

“The spinoffs and benefits that the rest of the economy will derive from AI is a multi-year, multi-decade process,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “Is this an additional element of growth or is it now diverting spending away from other things because all other parts of the economy, outside of travel, leisure and restaurant spending, don’t seem to not go so well?”

Boockvar pointed out that small-cap stocks, for example, were losing big on Thursday, with the Russell 2000 down about 0.8% in the early afternoon.

“Serious holes in the economy”

This happened even though it appears that these companies would benefit from the economics of AI, such as the ability to reduce personnel costs. Nvidia’s main competitor in the field of chips, Intel, was also criticized, down 6.2% on the session. Quarterly tech profits fell 10.4% overall at the start of this week, according to FactSet, although some of the biggest companies beat Wall Street’s lower expectations.

“There are serious holes in the economy that we cannot ignore here,” Boockvar said. “If the AI ​​craze cools, people will see that the underlying business trends of Microsoft, Google, and Amazon are clearly slowing down because we’re all breathing the same economic air.”

AI hasn’t been a win-win for everyone, either.

DataTrek Research looked at nine major AI-related companies that entered the market through initial public offerings over the past three years and found that their collective valuation was down 74% from their levels. departure.

The group includes UiPath, Pagaya Technologies And exscientia. Their shares rallied in 2023, up an average of 41%, but the seven biggest tech companies, a group that includes Nvidia, jumped an average of 58%.

“So far, Big Tech has collectively benefited the most from the buzz around Generation AI. We believe this trend will continue given their ability to leverage their global scale and broad competitive moats during use of this disruptive technology,” wrote DataTrek co-founder Nicholas Colas. “Generation AI could end up making America’s Big Tech even bigger and more systematically important, rather than allowing newcomers to play the classic role of disruptive innovators.”

Indeed, market veteran Art Cashin noted that without the Big Seven, the S&P 500 would give up its entire 8% gain this year.

“You know, supposedly, high tide lifts all the boats,” UBS’s director of ground operations said on CNBC’s “Squawk on the Street.” “It’s a very selective tide. And I’m not ready to throw the confetti just yet.”

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