The Dow Jones Industrial Average (DJIA) steadied its grip on Monday, starting the new trading week holding near the 47,000 major handle and lifting around 300 points. Equity markets pulled back last week as the AI tech rally shows signs of unwinding, or at least taking a breather, and investors are looking for an end to what has become the longest US government funding shutdown in history.
Following a week of exhaustion-based pullbacks, AI tech leaders are back at the forefront as investors await meaningful details on a possible funding gap for federal operations to resume. The funding bill, which only keeps the US government open through January, will put markets on a collision course with further political unease in a few months’ time.
Hopes for a temporary funding solution reignite investor hopes
The longest US government shutdown in history has pushed consumer confidence to its lowest readings on record, according to data from the University of Michigan last week. A lack of official numbers on inflation and employment has also pushed investors to increase their reliance on volatile public datasets.
This week would have seen the release of the latest US Consumer Price Index (CPI) and Producer Price Index (PPI) inflation datasets, but there is hope that the US House of Representatives will push a pending temporary funding measure through in time to get a fresh round of inflation and employment statistics before the Federal Reserve’s (Fed) next interest rate decision on December 10. At the latest interest rate decision, Fed Chair Jerome Powell expressed unease about making further interest rate moves amid a lack of critical government data, sending December rate cut hopes into a tailspin.
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AI stocks FAQs
First and foremost, artificial intelligence is an academic discipline that seeks to recreate the cognitive functions, logical understanding, perceptions and pattern recognition of humans in machines. Often abbreviated as AI, artificial intelligence has a number of sub-fields including artificial neural networks, machine learning or predictive analytics, symbolic reasoning, deep learning, natural language processing, speech recognition, image recognition and expert systems. The end goal of the entire field is the creation of artificial general intelligence or AGI. This means producing a machine that can solve arbitrary problems that it has not been trained to solve.
There are a number of different use cases for artificial intelligence. The most well-known of them are generative AI platforms that use training on large language models (LLMs) to answer text-based queries. These include ChatGPT and Google’s Bard platform. Midjourney is a program that generates original images based on user-created text. Other forms of AI utilize probabilistic techniques to determine a quality or perception of an entity, like Upstart’s lending platform, which uses an AI-enhanced credit rating system to determine credit worthiness of applicants by scouring the internet for data related to their career, wealth profile and relationships. Other types of AI use large databases from scientific studies to generate new ideas for possible pharmaceuticals to be tested in laboratories. YouTube, Spotify, Facebook and other content aggregators use AI applications to suggest personalized content to users by collecting and organizing data on their viewing habits.
Nvidia (NVDA) is a semiconductor company that builds both the AI-focused computer chips and some of the platforms that AI engineers use to build their applications. Many proponents view Nvidia as the pick-and-shovel play for the AI revolution since it builds the tools needed to carry out further applications of artificial intelligence. Palantir Technologies (PLTR) is a “big data” analytics company. It has large contracts with the US intelligence community, which uses its Gotham platform to sift through data and determine intelligence leads and inform on pattern recognition. Its Foundry product is used by major corporations to track employee and customer data for use in predictive analytics and discovering anomalies. Microsoft (MSFT) has a large stake in ChatGPT creator OpenAI, the latter of which has not gone public. Microsoft has integrated OpenAI’s technology with its Bing search engine.
Following the introduction of ChatGPT to the general public in late 2022, many stocks associated with AI began to rally. Nvidia for instance advanced well over 200% in the six months following the release. Immediately, pundits on Wall Street began to wonder whether the market was being consumed by another tech bubble. Famous investor Stanley Druckenmiller, who has held major investments in both Palantir and Nvidia, said that bubbles never last just six months. He said that if the excitement over AI did become a bubble, then the extreme valuations would last at least two and a half years or long like the DotCom bubble in the late 1990s. At the midpoint of 2023, the best guess is that the market is not in a bubble, at least for now. Yes, Nvidia traded at 27 times forward sales at that time, but analysts were predicting extremely high revenue growth for years to come. At the height of the DotCom bubble, the NASDAQ 100 traded for 60 times earnings, but in mid-2023 the index traded at 25 times earnings.