WHAT HAS CHANGED IN 2023?
In the first eight months of 2023, the equity markets have outperformed expectations. The S&P 500 is up over 15% for the year to date. However, these returns are significantly driven by the technology sector, including companies such as NVIDIA, AMD, APPLE, META, and TESLA. NVIDIA is leading these returns, posting a YTD return of 222% in August. In fact, the equally weighted S&P 500 return is closer to 5% for the YTD, which is more aligned with expectations. These technology stocks are the same ones that caused significant negative returns in 2022, which leads investors to one important question. What has changed? The answer, artificial intelligence (AI).
WHAT IS ARTIFICIAL INTELLIGENCE?
At its basic definition, artificial intelligence means a machine that is capable of simulating some cognitive functions of biological brains. Most people have expectations of AI from the movies, making it feel like science fiction. However, artificial intelligence has already begun integrating itself in day-to-day life. Most people use it every day without knowing it. When people are shopping online, streaming shows, ordering food deliveries, finding a ride share, or enjoying music, they are most likely using AI. For example, when Netflix gives a user recommendation on shows to watch, that is artificial intelligence “learning” about the user and applying its algorithm to fit their needs. Additionally, voice assistants like Google and Alexa are all using AI. Although this technology has been around for a while, its recent advances have caused a “frenzy”.
WHAT IS HAPPENING TO ARTIFICIAL INTELLIGENCE IN 2023?
In November 2022, OpenAI developed an application called “ChatGPT”, which has gained popularity through 2023. This app generates responses like humans in real-time, based on the user’s input. It has been used to write essays in mere minutes, code new apps, and even do simple tasks such as creating a shopping list. Its uses are truly endless. Google has also released a competitor app in 2023, called Bard. These applications are the first of their kind and are the start of the next era of technology. This excitement alone has boosted the technology industry as a whole. However, the most significant reason for the increase in stock prices mentioned above, is the need for more sophisticated hardware, such as semiconductor chips, to keep up with the more sophisticated software. As of now, NVIDIA is the primary chip producer with the most advanced technology. Therefore, with the demand for AI increasing, so is the demand for NVIDIA’s semiconductors.
WHAT DOES THIS MEAN FOR INVESTORS?
With the increasing rate of development, many people are both excited and terrified of the future. AI is going to change our daily lives in ways that we do not even realize yet. It is also going to make some jobs obsolete. Some industries have already started to see disruptions, such as Media and Marketing. Hollywood is still in gridlocks as writers are on strike, part of which is caused by the use of AI in movie making. However, the good news is that ultimately, AI will create new jobs and will increase productivity. According to Goldman Sachs, generative AI will boost US productivity growth by roughly 1.5 percentage points per year over a 10-year period. The firm expects that, in turn, to result in a 4-percentage-point increase in S&P 500 net profit margins.
So, what does this mean for investors? Should investors shift their portfolios towards technology? Should they sell off holdings in industries that are going to be disrupted? These questions have been the focus of many. Right now, market participants are overconfident in their ability to predict the future of AI, which has caused the rapidly increasing stock prices. As Mike Coop, Chief Investment Officer of Morningstar Investment Management, said “this has created a dangerous point for investors." In reality, technology accelerates at a pace that is impossible to predict. Investors can’t accurately price something that doesn’t exist yet. Therefore, it is important to be cognizant of just how high a price is being paid for the promise of what AI may or may not deliver for any individual company. There is going to be a lot of disruptions in the markets while people are trying to determine how AI fits into each industry. Therefore, as tempting as it may be to shift a portfolio to technology in this market, it remains imperative to continue to diversify holdings and remain cautious to the uncertainties of artificial intelligence. Technology should still be a part of the portfolio, just not all of it. It is important to include stocks that are able to insulate a portfolio against recession risks and also include non-equity holdings. Please, contact one of our financial advisors or email Anna Fanning at afanning@g5financialgroup.com for more information.
Sources:
Taking stock: Q3 2023 equity market outlook | BlackRock
Stock Market Outlook: How AI Can Boost Productivity, Help Avoid Crash (businessinsider.com)
https://www.cnbc.com/2023/08/11/investors-are-overconfident-about-the-ai-impact-strategist-says.html