The artificial intelligence stock-market rush
PHILOSOPHERS, technologists, writers, artists and even the English musician Sting are busy debating whether the human race can survive the rise of artificial intelligence (AI). How long will these more advanced and consistent versions of our mental selves put up with mankind’s inefficiencies?
Politicians and tech executives, meanwhile, are already pounding the table for their visions of AI regulation. But if there’s one quality of AI on which everyone agrees, it’s the fact that it is a highly lucrative investment.
AI could produce a machine-led revolution, take over millions of jobs and help schoolchildren cheat on their homework. The exact role AI plays in the future is unclear, but it’s surely going to play a major role.
In the present, AI is already one of those once-a-decade investing phenomena that has captured the imagination of day traders and hedge-fund managers alike.
It seems that all a company has to do is mention the phrase “artificial intelligence” in a US Securities and Exchange Commission filing for its stock to take flight.
Last week, for example, Snowflake – part of last decade’s hot-stock niche, cloud computing – divulged that it was considering acquiring an AI company. Snowflake went on to have its best day on the market in months.
“AI right now seems to be the magic words to say, just like bitcoin was a few years ago” said JJ Kinahan, the chief executive of IG North America and president of its brokerage tastytrade.
“I do think AI can change things, but I also think the market falls in love occasionally with certain concepts. Right now, AI is what the market is very high on.”
Steven Cohen, the founder of SAC Capital and chairman of Point72 Asset Management, is someone who knows a bull market when he sees one.
The 66-year-old hedge fund manager made his first billion piling into tech stocks during the dotcom bubble. He was perhaps a little late to sell when the bear markets arrived in 2000, 2008 and 2020, but he was always timely with his positioning for the bull markets.
Many have accused Cohen of insider trading in the past, but nobody has accused him of misreading market signals.
“We are going up,” Cohen told Bloomberg recently, pointing to a “big wave” of AI opportunities.
There is a hierarchy of stock-market speculation. The Internet was a thing in the real world. It was a technological advance that touched billions of lives, changed society forever and drove two decade-long bull markets, albeit with a major crash and a long lull after 2000. Call it a good bubble.
Cloud computing – the storage of data on networked, off-site servers – was a thing in the real world, but its impact on society was marginal. Stocks like Snowflake surged to unsustainable heights as investors dreamed on Cloud Nine, and saw dramatic corrections when the euphoria wore off. Call this an OK bubble.
And then there are cryptocurrencies. During the two great bouts of cryptocurrency speculation – the first in 2017, and the second from 2019 to 2022 – investors had their head in the clouds.
Bitcoin had the potential to turn the financial system on its head. As a practical matter, it was seldom used for any real-world purpose beyond speculation and anonymous marijuana purchases. That’s a bad bubble.
Even sceptics of AI investment say the technology is already of far more economic significance than cryptocurrencies.
“In as much as we are seeing AI being used everywhere, it’s not the case with crypto,” said Oliver Pursche, a senior vice-president at financial advisory Wealthspire. “We are still use-case testing and trying to figure out how to do this.”
It’s hard to find a publicly traded company at which bitcoin made a lasting difference to the bottom line, with the exception of the small niche of crypto exchanges such as Coinbase, which have come back down to earth since their initial surge.
Computers equipped with generative AI can communicate to such a sophisticated extent that they are almost indistinguishable from sentient humans in digital conversation.
Perhaps most significantly, generative AI software is capable of creative communication. The ability to come up with new ideas has profound implications for literature and visual art, as was demonstrated by German photographer Boris Eldagsen, who won a major Sony World Photography prize for a work he submitted that he later disclosed was synthesised by AI.
The same powers of creativity could make AI a force in the fields of law, accountancy, surgery and countless others. That’s why some Wall Street firms are revising their profit projections for multiple S&P 500 industry groups, based on the adoption of AI.
“Our economists’ productivity estimates suggest AI could boost net margins by nearly 400 basis points over a decade,” said analysts at brokerage Goldman Sachs.
“AI is not just about the Nvidias and the Googles and the Microsofts of the world,” said Pursche. “It’s also about increasing worker productivity and therefore potentially having a significant positive impact on margins across multiple industries.”
AI has already moved the needle for corporate profits.
Microsoft, whose cloud computing and XBox businesses had to labour in the shadow of Windows for years before they warranted a mention as revenue catalysts, has already cited generative AI such as ChatGPT as a major contributor to its recent revenue growth.
Investors have taken notice. Microsoft is up 33 per cent for the year to date, one of the biggest first-half gains since it launched on public markets in the 1980s. Shares of Nvidia, the maker of advanced chips needed to drive the AI, have more than doubled since the start of the year.
If AI is making an impression on the profits and stock price of a behemoth like Microsoft, imagine how fast a pure-play generative AI company would be growing. That, at least, is what the bulls are saying.
For investors, the trick is always distinguishing whether the robust profit growth that’s growing out of AI is already priced into the stock market – and into the value of pure-play startups in Silicon Valley by venture capitalists.
AI optimism has already caused such a flurry on the stock market, arguably accounting for the resurgence of the S&P 500 to near records that one brokerage said it has created a “baby bubble”.
AI’s trajectory on the stock market could follow that of the Internet: an initial rush for bountiful lucre followed by a period of restraint on investment imposed by regulators as the ground rules for the new technological and social paradigm emerge.
“Uncertainty around both the eventual economic impact of AI and the regulatory response it may elicit is high,” said the Goldman Sachs analysts.
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