The gap between what artificial intelligence wants to achieve and what it can achieve remains large, which could pose a problem for investors.
Artificial intelligence has a lot of potential. We will no longer need to fill out forms, order takeout, or drive our own cars. Ultimately, WallyPeople can lie back in deck chairs while the robots do all the work. terminatorA world where robots are trying to destroy humanity.
AI-related stocks:
S&P 500 Index
This year it’s Nvidia
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Who’s making the chips? Or is it Microsoft?
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The company has benefited from its relationship with ChatGPT and its adoption of its technology in its products, as Apple bounced back after a tough start to the year, in part on hopes that the tech will create demand for AI-enabled iPhones.
All one needed to know was that AI stocks were rising to know the market would also rise.
But there are signs that the risks and rewards of AI stocks may not be what they once were.
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UiPath surges 19% after reporting smaller-than-expected loss
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HP Inc. fell 34% after the company issued a below-consensus revenue outlook and announced the sudden resignation of its CEO.
Co., Ltd,
The company beat earnings estimates and touted an “innovative solutions portfolio for the AI and hybrid era,” leading to a 17% gain in shares for Dell Technologies.
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The company plunged 22% in trading on Friday after earnings beat expectations by 1 cent. Clearly, that wasn’t enough for a stock that’s risen 80% in the past three months.
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Investing in individual AI stocks offers big rewards but also big risks throughout earnings season. Dennis DeBusscher of 22V Research points out that since the release of ChatGPT4 in 2022, 86% of what he calls “AI-enabled” companies have outperformed, outperforming 78% of the overall market. These stocks have risen more when they beat expectations than ordinary stocks, with an average rise of 0.3% after beating expectations in the past quarter, compared with a 0.3% drop for other stocks after beating expectations. But when they fall short, watch out: AI stocks that missed expectations fell an average of 5.3% after release, compared with a 2.5% drop for other companies. “Ultimately, these stocks have a high beta to earnings surprises,” DeBusscher explains.
Yet, when it comes to the overall market, there’s only one AI stock that really matters: Nvidia. Prior to its May 22 earnings release, the company’s stock had a 0.95 correlation with the S&P 500, according to Evercore ISI data. That’s another way of saying that the two stocks have moved almost perfectly together over the past year. Correlation isn’t the same as causation, but in this case it’s damn close.
But something changed recently. Nvidia’s shares rose 9.3% in the trading day after the announcement, a staggering figure for a company with a market capitalization of more than $2 trillion. Nvidia’s gains also helped other stocks rally, according to 22V’s Debusschere, including semiconductor stocks like ASML Holdings.
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Broadcom
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Industries such as Marvel Technology, Taiwan Semiconductor Manufacturing, and Eaton
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Transdigm Group
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Johnson Controls International, and utilities such as Constellation Energy and Vistra.
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But the S&P 500 closed lower the day after Nvidia’s announcement. “Momentum in the AI trade is very strong,” DeBusschere wrote. “NVDA’s earnings-driven AI trade did not ruffle the broader market.”
That’s concerning. Evercore ISI strategist Julian Emanuel points out that Nvidia’s stock rose 20% in the three days after the earnings release, while the S&P 500 fell only slightly (less than one index point). The fact that the third-largest stock in the S&P 500 rose so much while the index barely moved left him puzzled, so he looked for another example of the top five stocks in the S&P 500 rising by at least as much while the index fell, but he couldn’t find one.
“With NVDA no longer a market representative stock, the ‘calm’ of low market volatility that has prevailed over the past two weeks is likely coming to an end,” he wrote.
Although it was only a little, the peace seemed to be beginning to crumble.
CBOE Volatility Index,
Or the VIX, which rose from 11.93 on Monday to 14.51 on Friday, bringing a little noise into a very sluggish market. With the rally losing steam, it may be time to consider moving on from what worked to what didn’t.
Dow Jones Industrial Average.
Nowhere is this more antithetical to an AI-driven market than the Dow, whose largest holdings are UnitedHealth Group Inc. and Goldman Sachs Group Inc., as Nvidia is not included in the benchmark, which is a price-weighted index.
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Microsoft comes in third, while Apple falls in the middle, sandwiched between JPMorgan Chase and Boeing.
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It’s no wonder the blue-chip index is up just 1.2% this year, far below the 9.3% gains of the S&P 500 and the 10.3% rise of the Nasdaq Composite, and has been hurt recently by a dismal earnings report from UnitedHealth and disappointing results from Salesforce.
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Honestly, this should never have been replaced.
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ExxonMobil
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Still, the Dow Jones Industrial Average has fallen 4.7% since surpassing 40,000 on May 17, making it the most oversold since September 2022 as of Thursday’s close, according to Larry MacDonald of Bear Trap Report.
It may not be the robot’s choice, but the demise of AI trading could do worse than the Dow Jones Industrial Average.
Write Ben Levisohn Ben.Levisohn@barrons.com
