Artificial Intelligence is now seen as the magic pudding for Treasurer Jim Chalmers, who has told us in his Intergenerational Report that we should expect the AI genie to come to our economic rescue, and the AFR tells us that the CBA economic team agrees.
This is what the newspaper’s Economics Editor has told us: “Commonwealth Bank and artificial intelligence giant Anthropic are both tipping AI will deliver a productivity bonanza for Australia, aligning with Treasurer Jim Chalmers’ Intergenerational Report, which some have criticised as too optimistic in its long-term outlook.”
Famous US hi-tech fund manager Cathie Wood is also a big fan of what AI is going to produce, arguing the historical global growth rate of around 3% will spike to 7% by 2030.
Meanwhile, Meta Platforms’ new artificial intelligence-powered personal assistant called Muse, which has become one of the fastest-growing apps in the world in the past week, has helped Wall Street turn tech stocks positive this week.
Explaining it, the market thinks a greater demand for AI agents means greater demand for chips leads to Nasdaq up, which pulls up the S&P 500 and even our market. On Monday the Nasdaq was up 2.8%!
Also helping Wall Street was talk of a possible Iran deal with a key Iran leader set to meet Trump at the UN, which took oil prices down overnight.
But it’s not all happy clappy out there for the stock commentators, with the AFR’s Chanticleer column shining the spotlight on what it called: “A dot-com flashing light.”
Let me break down the argument presented in this piece:
- The number of 52-week low stocks beat the 52-week high stocks in the S&P 500, and so “US market commentator and trader Jason Goepfert, who concedes he leans bearish, notes that the last time the S&P rose at least 1 per cent to within 1 per cent of a new high, and new 52-week highs were outnumbered by new 52-week lows, was on December 21, 1999, a few months before the top of the dotcom bubble.”
- The time before that was July 1929!
- Also, the market breadth is historically weak, meaning too few stocks are rising relative to ones falling or doing precious little. If the number of rising stocks is relatively small and gets even smaller as the overall market is rising, then it can be a sign that a reversal of the index is on the cards.
- If hyperscalers (the likes of Amazon, Microsoft and Google), which are building up data centres to accommodate the growth of, for example, Anthropic’s and OpenAI’s AI agents, see demand slowing for these AI market-drivers, they could pull back on their expansion plans and trigger a market sell-off.
“As Apollo Global Management chief economist Torsten Slok points out, market consensus says the hyperscalers’ operating cash flow will more than triple from $US600 billion to $US2 trillion by 2030.” That’s the kind of number that is driving AI market optimism, but it has to deliver on its promise, or else stock market optimists could turn pessimists.
That is, if this is too big a call, that could be a reason for AI believers to become less excitable about the future.
Oaktree Capital Management’s Howard Marks recently told Bloomberg that he doesn’t see “irrational exuberance” right now, but he added: “In my opinion, since roughly October 1, 2022, the markets have been generally ruled by optimists. The S&P 500 has more than doubled in that period. It’s been a very strong period.”
What we have is a lot of unknowns, such as:
- How do you quantify potential returns from AI investments?
- To what extent has AI optimism led to the share prices we see for the likes of Nvidia, Amazon, Oracle, etc getting out of whack with the intrinsic value of the company.
- Are we approaching a time when this disparity between share prices and intrinsic value is telling us that it’s time to be a seller rather than a buyer of AI-powered stocks, and the market generally?
- Could ARK Innovation Fund manager, Cathie Wood, be right when she sees a “golden age for stocks”? And so, this time, because of the extraordinary uniqueness of this AI technology, old flashing dotcom and Great Depression market signals have less relevance, at least for the near-term future.
We are four years into a bull market and the average bull market lasts 3.8 years on average, but some have stretched out to 10 years, and a number of these long ones have shown up in recent times.
The longest was March 2009 to August 2018, which lasted 3,453 days or 9.4 years, taking the S&P 500 up over 300%. Meanwhile the 1990 to 2000 bull market put on 417%.
The current bull market starting in October 2022 is up only 114%. If we use June 2023 as the starting point, the gain is only around 81%!
The argument for a stocks pullback is makeable, with concerns such as Iran, Trump, mid-term elections, inflation, interest rate rises and the AI hype all capable of spooking the stock market, but a crash looks less likely given the age of this bull market, the magnitude of the S&P 500’s rise in this bull market and the productivity potential of AI.
Of course, this is my best guess and I remain long stocks, but I know there can always be an unseeable curve ball that soon could be thrown by who knows who or what. If you need an example, think Coronavirus 2019-2020!
