How the explosion of artificial intelligence could save the market and possibly the economy

Huge earnings report on Wednesday from nvidia An important point has been made for both markets and the economy: for better or worse, AI is the future.

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

Nvidia’s huge financial first-quarter earnings helped define this phenomenon as the company edged into an elite group of tech leaders with trillion-dollar market valuations and a clear leadership position on both Wall Street and in Silicon Valley.

“AI is real, AI is not a fad, and we are only in its early infancy,” said Steve Blitz, chief US economist at TS Lombard. “Does it 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 very dramatic ways.”

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

Developing products like OpenAI’s ChatGPT, a chatbot that talks to the user, helped bring the capabilities home.

“It’s hard for me to exaggerate the value or impact of artificial intelligence, and that aligns with my view that the next decade is about the broadest application of the technology beyond what we’ve seen thus far, beyond computers and phones, and that application has enormous payoffs,” Blitz said.

For Nvidia, the upside was already evident.

As if earnings of $1.09 per share on revenue of $7.19 billion, both well above Wall Street estimates, weren’t enough, the company directed that it was expecting $11 billion in sales for the current quarter, largely driven by its leadership position in the artificial intelligence segment. Presentation of works.

Shares were up more than 26% at midday Thursday and the company’s market capitalization exceeded $950 billion.

However, the broader market reaction was disappointing.

While the S&P 500 semiconductor index jumped 11.4%, the broadest NASDAQ Composite It increased by 1.7%. the Standard & Poor’s 500 It was up about 0.9%, however Dow Jones Industrial Average It fell more than 50 points as investors continued to worry about the debt ceiling negotiations in Washington.

At the same time, fears of an economic slowdown lingered — despite his enthusiasm about AI, Blitz still believes the US is heading for a recession — and the lopsided market reaction was a reminder of a class economy in which technological benefits tend to spread slowly.

“The ramifications 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 Blakeley Advisory Group. “Is this an incremental piece of growth or is this now diverting spending from other things because every other part of the economy, except spending on travel, entertainment and restaurants, doesn’t seem to be going well?”

And Boockvar noted that penny stocks, for example, were losing significantly on Thursday, with Russell 2000 From about 0.8% in early afternoon trading.

This happened even though it seemed that these companies would benefit from the cost-saving aspects of AI such as the ability to reduce staffing expenses. Nvidia’s main competitor in the chip business, Intel, was also attacked, down 6.2% for the session. Quarterly technology earnings overall fell 10.4% for the week, according to FactSet, although some of the biggest companies beat Wall Street’s lower expectations.

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

AI wasn’t a winner for everyone either.

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

group includes UiPathAnd Bajaya Technologies And Exentia. Their shares are up in 2023, an average of 41%, but the seven largest technology companies, a group that includes Nvidia, have jumped an average of 58%.

“So far, large companies have collectively benefited from the hype around AI. We believe this trend will continue given their ability to leverage their global scale and large competitive moats when using this disruptive technology,” Nicholas Colas, co-founder of DataTrek writes. “AI may end up making big tech companies in the US systemically larger and more important, rather than allowing start-ups to play the classic role of disruptive innovators.”

Indeed, market veteran Art Cashin pointed out that without the big seven stocks, the S&P 500 would give up all of its 8% gains this year.

“High tide is supposed to lift all boats,” UBS’s director of ground operations said on CNBC’s “Squawk on the Street.” “This is a very eclectic tide. And I’m not ready to throw in the confetti yet.”