AI and Markets
The AI craze could further lift stock prices, boost capex, and delay the onset of the next recession. Looking further out, reaping the profit windfall from AI may take longer than many investors expect.
Once the debt ceiling soap opera ends, investors will likely turn their attention to some of the tailwinds supporting stocks. These include stronger earnings growth, diminished bank stresses, better housing data, early signs of an upleg in the manufacturing cycle, the prospects of an AI-driven productivity boom, and the fact that labor slack has managed to increase without rising unemployment. Investors should resist turning bearish on stocks for now but look to become more defensive later this year.
The Q1-2023 earnings season has surprised as companies’ results point to the end of the earnings recession. However, the good news is already priced in – the market has barely budged over the past six weeks. Earnings rebound may continue as long as the economy avoids a recession. However, inevitably, tighter monetary policy will weigh on demand, and recovery will come to a halt.
The conventional economic thinking about the likely impact of AI is misguided because it extrapolates linearly from what AI can do today to what it can do tomorrow. Just as the investment community and the broader public were blindsided by the exponential rise in Covid cases during the early days of the pandemic, they will be blindsided by how quickly AI transforms society and the economy.
The conventional economic thinking about the likely impact of AI is misguided because it extrapolates linearly from what AI can do today to what it can do tomorrow. Just as the investment community and the broader public were blindsided by the exponential rise in Covid cases during the early days of the pandemic, they will be blindsided by how quickly AI transforms society and the economy.
Innovative Tech will face macroeconomic headwinds in a new “higher for longer” interest regime. Yet, the long-term opportunity of the cohort is tremendous. Investors need to be judicious with the timing of adding new capital to these themes to bolster long-term returns.
Generative AI is a major technological breakthrough that holds tremendous economic and investment promise and will have sweeping effects on wide swaths of the economy. We are bullish on generative AI as a long-term investment theme. However, at the moment we observe hallmarks of an investment frenzy. We believe that there will be a more attractive entry point for patient investors.