How the AI ​​explosion may save the market and perhaps the financial system

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

vcg | Visual China Group | Getty Images

A blockbuster earnings report on Wednesday from Nvidia An important point emerged, both for the markets and for the economy: artificial intelligence is the future for better or for worse.

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

Nvidia’s tremendous first-quarter financial results helped quantify the phenomenon as the company moves closer to an elite group of technology leaders with a $1 trillion market valuation and clear leadership status on both Wall Street and Silicon Valley.

“AI is real, AI is not a fad and we are just getting started,” said Steve Blitz, chief US economist at TS Lombard. “Will it change the course of the economy over the next three to six months? Probably not. Will it change the economy in the next three to six years? Definitely, and in a very interesting way.”

Among the changes Blitz predicts are reduced demand for foreign labor, a “point-of-sale” effect where coding and creative writing can be done by machines rather than humans, and a host of other activities that will take place across the globe go beyond what now seems obvious.

The development of products like OpenAI’s ChatGPT, a chatbot that communicates with the user, has helped demonstrate the potential.

“It’s hard for me to overestimate the value or impact of AI, and it’s consistent with my view that the coming decade is all about the broader application of technology beyond what we’ve seen so far, via computers and phones beyond.” “This application has tremendous potential,” said Blitz.

Isolated effects so far

The upward trend is already evident for Nvidia.

As if earnings of $1.09 per share on sales of $7.19 billion, both well above Wall Street estimates, weren’t enough, the company projected sales of $11 billion, largely driven by its leadership in AI chips-delivery business.

Shares are up more than 26% as of Thursday afternoon and the company’s market value surpassed $950 billion.

However, the overall market reaction was disappointing.

While the S&P 500 semiconductor index was up 11.4%, the broader index was higher Nasdaq Composite rose a more muted 1.7%. The S&P 500 rose about 0.9% while the Dow Jones Industrial Average The index slipped more than 50 points as investors continued to fret over Washington’s debt ceiling negotiations.

At the same time, worries of an economic slowdown lingered – despite his enthusiasm for AI, Blitz still believes the US is headed for recession – and the lopsided market reaction served as a reminder of a stratified economy where technological advantages tend to spread slowly.

“The spillover and the benefits that the rest of the economy will see from AI is a multi-year, multi-decade process,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “Is this an additional contributor to growth, or is spending now being diverted to other things because all other areas of the economy, aside from spending on travel, leisure and restaurants, don’t seem to be doing so well?”

Boockvar pointed out that small-cap stocks, for example, posted big losses on Thursday Russell 2000 down about 0.8% in early afternoon trade.

“Serious holes in the economy”

This happened even though it appeared that these companies would benefit from the cost-saving aspects of AI, such as the ability to reduce staff costs. Nvidia’s main competitor in the chip area, intel, also came under heavy pressure, losing 6.2% over the session. Quarterly tech earnings fell 10.4% overall earlier this week, according to FactSet, even as some of the largest companies beat Wall Street’s lowered expectations.

“There are some serious gaps in the economy that we cannot ignore here,” Boockvar said. “As the AI ​​craze dies down, people will realize that the underlying business trends of Microsoft, Google and Amazon are slowing significantly because we are all breathing the same economic air.”

AI wasn’t a winner for everyone, either.

DataTrek Research examined nine large AI-related companies that came to market through IPOs over the past three years and found that their overall valuation has fallen by 74% compared to their debut levels.

The group includes UiPath, Pagaya Technologies And To know. Its shares have rallied in 2023, up an average of 41%, but the seven largest tech companies, which include Nvidia, are up an average of 58%.

“To date, Big Tech has collectively benefited the most from the gene AI craze. We believe this trend will continue as they leverage their global reach and strong competitive advantages in leveraging this disruptive technology,” wrote Nicholas Colas, co-founder of DataTrek. “The AI ​​of the generation could lead to US big tech companies becoming even larger and systematically more important, instead of allowing newcomers to play the classic role of disruptive innovators.”

In fact, market veteran Art Cashin noted that without the seven big stocks, the S&P 500 would give up its entire 8% gain this year.

“You know, the tide supposedly lifts all the boats,” UBS’s head of ground operations told CNBC’s Squawk on the Street. “This is a very selective flood. And I’m not ready to throw away the confetti yet.”

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