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

by SuperiorInvest

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

VCG | Visual China Group | Getty Images

AND blockbuster earnings report Wednesday from Nvidia crystallized an important point for both markets and the economy: For better or worse, artificial intelligence is the future.

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

Nvidia massive first quarter fiscal profits helped quantify the phenomenon as the firm nears an elite group of tech leaders with a $1 trillion market valuation and clear leadership on both Wall Street and Silicon Valley.

“AI is real, artificial intelligence is not a fad and we are only in the early stages,” said Steve Blitz, TS Lombard’s chief US economist. “Will it change the course of the economy over the next three to six months? Probably not. Will it change the economy over the next three to six years? Absolutely, and in very interesting ways.”

Some of the changes Blitz foresees are a reduced demand for foreign labor, a “point of sale” effect where coding and creative writing can be done by machines instead of humans, and a host of other activities that go beyond what now seems obvious.

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

“It’s hard for me to overstate the value or impact of artificial intelligence, and it’s consistent with my view that this coming decade is about the broader application of technology beyond what we’ve seen so far, beyond computers and phones, and there’s a tremendous upside to that application,” Blitz said.

So far isolated effects

For Nvidia, the advantage was already obvious.

As if earnings of $1.09 and a share of sales of $7.19 billionboth well above Wall Street estimates, fell short, the company guided that it expects $11 billion in revenue for the current quarter, driven in large part by its leadership in AI chip shipments.

Shares soared more than 26% by midday Thursday, pushing the company’s market value past $950 billion.

But the broader market response has been underwhelming.

While the S&P 500 semiconductor index jumped 11.4%, broader Nasdaq Composite grew by a more subdued 1.7%. The S&P 500 rose 0.9% while Dow Jones Industrial Average fell more than 50 points as investors continued to worry about it negotiations on the debt ceiling in Washington.

At the same time, fears of an economic slowdown persisted—despite his enthusiasm for artificial intelligence, Blitz still thinks the U.S. is headed for recession—and the market’s lopsided reaction served as a reminder of a stratified economy in which technological advantages spread slowly.

“The spillover and the benefits that the rest of the economy will get from AI is a multi-year, multi-year process,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “Is it an addition to growth, or is it now a diversion of spending away from other things because every other part of the economy, apart from travel, leisure and restaurant spending, seems to be doing so well?”

Boockvar pointed out that small-cap stocks lost significantly on Thursday Russell 2000 off about 0.8% in early afternoon trading.

“Serious holes in the economy”

This has happened even though it appears that these companies would benefit from the cost-saving aspects of AI, such as the ability to reduce staffing costs. Nvidia’s main chip competitor, Intel, was also slammed, down 6.2% on the session. Quarterly tech earnings fell 10.4% overall through this week, according to FactSet, although some of the biggest firms beat Wall Street’s lowered expectations.

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

Nor was AI a winner for all.

DataTrek Research looked at nine large AI-related companies that went public through initial public offerings over the past three years and found that their collective valuations are 74% below their debut levels.

The group includes UiPath, Pagaya Technologies and Exscientia. Their shares rose an average of 41% in 2023, but the top seven tech companies, a group that includes Nvidia, rose an average of 58%.

“So far, Big Tech has collectively benefited the most from the buzz around gen AI. We think this trend will continue given their ability to leverage their global scale and large competitive moats to leverage this disruptive technology,” wrote DataTrek co-founder Nicholas Colas. “Gen AI may end up making US Big Tech even bigger and more systematic, rather than allowing upstarts to play the classic role of disruptive innovators.”

Indeed, market veteran Art Cashin noted that without the big seven stocks, the S&P 500 would have given up all of its 8% gain this year.

“You know, the tide is supposed to lift all boats,” UBS’s head of floor operations said on CNBC.Shouting in the street“This is a very selective influx. And I’m not ready to throw the confetti yet.”

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