Nvidia released a blockbuster profit report on Wednesday that indicates artificial intelligence (AI) is no longer just a fad, but the future of technology. AI will play a role in virtually everyone’s lives, from personalized shopping to self-driving cars and robotics used in healthcare, gaming and finance. Nvidia’s earnings for the first fiscal quarter were massive, and the company is now nearing an elite cast of tech leaders with $1 trillion market valuations and clear leadership in both Wall Street and Silicon Valley.
Steve Blitz, Chief U.S. Economist at TS Lombard, stated that AI is real and that it will change the economy in very interesting ways over the next three to six years. Blitz predicts that AI development will result in reduced 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 that go beyond what appears obvious now.
OpenAI’s ChatGPT, a chatbot that converses with the user, has helped bring home the potential for AI. Blitz believes that AI has tremendous upside and that the coming decade is all about the broader application of technology beyond what we’ve seen to date, beyond computers and phones.
Market Reaction and Economic Implications
The market reaction to Nvidia’s earnings report was underwhelming. While the S&P 500 semiconductor index jumped 11.4%, the broader Nasdaq Composite only rose by 1.7%. This lopsided market reaction served as a reminder of a stratified economy in which technological benefits tend to spread slowly.
Peter Boockvar, Chief Investment Officer at Bleakley Advisory Group, believes that the spillover and the benefits that the rest of the economy will derive from AI is a multiyear, multidecade process. He wonders if this is an incremental piece to growth or if it is now diverting spending from other things because every other part of the economy, outside of spending on travel, leisure and restaurants, does not seem to be going that well.
Small-cap stocks were losing big on Thursday, with the Russell 2000 off about 0.8% in early afternoon trading. This happened even though it seems those companies would benefit from the cost-saving aspects of AI, such as the ability to reduce staffing expenses. Nvidia’s chief competitor in the chip space, Intel, was also getting slammed, down 6.2% on the session. Quarterly tech earnings overall declined 10.4% heading into this week, according to FactSet, though some of the biggest firms did beat Wall Street’s lowered expectations.
DataTrek Research looked at nine big AI-related companies that came to market through initial public offerings over the past three years and found their collective valuation is down 74% from their debut levels. The group includes UiPath, Pagaya Technologies, and Exscientia. Their stocks have rallied in 2023, up an average 41%, but the seven-largest tech companies, a group that includes Nvidia, have surged an average 58%.
AI hasn’t been a winner for everyone. Market veteran Art Cashin noted that without the big seven stocks, the S&P 500 would surrender all of its 8% gain this year. AI is the future of technology, and it will change the economy in very interesting ways over the next three to six years. However, it will not change the course of the economy over the next three to six months. It’s a multiyear, multidecade process, and the benefits of AI will tend to spread slowly.
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