Wall Street has a lot to worry about — recession and war in Europe, interest rate hikes, sticky inflation, and a softening US economy.
But there's at least one sector of market euphoria keeping investors optimistic: artificial intelligence.
Last Thursday, the S&P 500 entered a bull market — up 20% from its recent lows. In a note on Friday, Bank of America economists said the move upwards was mostly because investors have bought into a singular equity theme: AI.
"Recent developments in generative AI herald a sea change," they wrote.
But the market's strength has been mostly driven by a handful of mega-cap tech stocks, Alphabet, Meta, Apple, Amazon and Nvidia. That's why the tech-heavy Nasdaq (up 27%) and the S&P 500 (up 12%) are so much higher this year than the Dow Jones Industrial Average (up just 2%).
The returns from those five tech stocks this year are the largest we've seen in the past two decades, said Matt Bartolini, head of SPDR Americas research at State Street Global Advisors. This year, Nvidia's stock is up 165%. Meta is up 120%. And Apple, Amazon and Alphabet are all up around 40%.
Before the Bell spoke with Bartolini about what the AI boom means going forward and whether investors should be weary.
This interview has been edited for length and clarity.
Before the Bell: AI is causing a big market boom right now, but that boom also seems to be concentrated in mega-cap tech stocks. Can that last?
Matt Bartolini: The stocks we talk about with the AI craze are all going to be tech related, and these large cap companies are the ones infusing AI and a lot of their capabilities. AI is a very nebulous topic, a lot of people just want to think of it as ChatGPT, but it can also refer to the predictive text on your iPhone.
It's more about how technology has proliferated across different types of industries and consumer segments. We've seen a flight to quality this year that benefited firms that have sustainable, repeatable cash flows with sound balance sheets. And these mega cap tech conglomerates are those types of firms. So the rise in semiconductor stocks is definitely AI fueled, Nvidia being one of those, but I think this narrow market leadership speaks to trying to find companies that have good cash flow characteristics. And yeah, and those are just the largest firms.
A lot of companies are claiming to work in the artificial intelligence space. How can investors tell which companies are actually going to benefit from a potential AI boom?
That's the hardest thing to do right now. We often see this happen during technological crazes. A Long Island iced tea company renamed itself 'Long Island Blockchain' and its stock soared 200%. Pets.com popped up in the dot com boom. It's a song as old as time. If you look at the recent earnings transcripts from S&P 500 companies, the mentions of AI were everywhere.
So to some extent it's just a buzzword companies use to gain notoriety and to infuse a bit of optimism into their forward guidance. Still, a lot of companies are using AI as a connective technology.
I hate to use the "B" word but I wonder if this is a bit of a bubble?
I don't think we're there yet. I'm not saying that we won't be, but I think there's some restraint to it. If there was a bubble you would see more retail investors using ETF structures to focus on specific themes or that have AI in their name. They've gotten a bit of inflow but not to the degree where you'd say 'something's up here.'
You also have a pretty narrow, myopic marketplace in terms of companies leading on AI. A lot of major tech stocks have done well, but smaller companies haven't. In a bubble, you'd see a significant amount of stocks throughout the area benefiting.
What is happening is that AI has been around for a really long time, and now there's a branding bubble, so to speak, where it's the subject of a lot of press and general conversations around the dinner table. But I don't think from a stock perspective we've reached a full scale bubble.
So what would you say to a Main Street investor who wants to invest in AI?
At the beginning of the year we identified semiconductors as an area of the market that was trading below its perceived fair value because of such poor returns in 2020. The entire industry was trading below its historical price to earnings ratio but now it's trading above it.
What I would say to those investors is that if you're looking to get into the AI industry, it's really easy to get the theme call right but the stock call wrong.
You buy a semiconductor stock, because you think it's gonna be a home run, but maybe the firm has an accounting issue. So rather than buying single stock equities to play a theme, we have discussions with investors about using concentrated industry exposures that allow you to diversify that single stock risk. On average stocks underperform by more than the sector average.
Comments
Post a Comment