While the premise is believable, I expected a more researched and persuasive piece than 4 paragraphs of "Nvidia went up and there's a lot of AI hype, so the stock market rally must be all because of it".
"On its own, the price of Nvidia is responsible for an enormous slice of the stockmarket recovery. Since the end of November the firm’s market capitalisation has soared from under $400bn to $925bn—accounting for a fifth of the rally. Add Nvidia’s surge to the growing market capitalisations of the 13 other firms with ai exposure and a remarkable 73% of the broader rally is explained."
"In November the average price to current earnings multiple of an s&p 500 firm, excluding the 14 most exposed to ai, was around 27. As we went to press, the multiple had dipped to 26. Meanwhile, the average multiple of firms in our ai bucket had leapt from 43 to 77."
Not sure what you would expect - they just point to the fact that most of the rally is achieved through the 'AI' companies - the rest of the index is actually down, or mostly down. That's fact. What more do you want to be more persuasive ?
Almost all of S&P 500's recent rally has come from 5 companies - Nvidia, Apple, Google, Microsoft and Amazon (https://www.axios.com/2023/06/01/sp500-tech-companies-stock-...). Are they all "AI companies"? Sure, but they also do basically everything else. So it's still a pretty flimsy correlation.
A more reasonable explanation is that there was an overcorrection in big tech valuations during the downturn a couple years ago (while they are all continuing to make record profits quarter after quarter), and now after layoffs and cost cutting the market is slowly normalizing in their favor.
Amazon and Apple are a bit different, but Nvidia and Microsoft are purely seen as 'AI' play (MSFT through Open AI) as far as I know. Google indirectly profits from that too.
Microsoft is a huge conglomerate and the vast majority of their revenue has nothing to do with AI. Moreover, they have a partnership with OpenAI, but it's not at all clear that their lead is going to stick long enough to turn it into anything. Everybody is doing research on this now and all it takes is for somebody else to do it better.
chat.openai.com has about 2B visitors per month with an average visit duration of 7 minutes (https://www.similarweb.com/website/chat.openai.com/). It is not unreasonable to expect that every visit costs OpenAI about $0.10 dollars; which they pay directly to Microsoft. In effect, this means that Microsoft's revenue is 200 million per month or 2.4B per year if this continues like this. That's already equal to 1% of Microsoft's total revenue of 2022. Note that this is chat.openai.com only but I can imagine that the API also has quite some traffic. Oh and wait, on top of this Microsoft has a 49% ownership of OpenAI and OpenAI is still the best LLM in town, so it's not unreasonable to expect further growth.
> [...], but it's not at all clear that their lead is going to stick long enough to turn it into anything
People are saying that since January, but here we are in July and GPT-4 is still the best model. While everybody is catching up, they have (1) the processes in place to come up with new ideas and get them working (2) a head-start of many months (note that GPT-4 was basically done in Sep 2022).
If you look at the profits these companies are making - with ~zero of it coming from AI products at the moment - the valuations are in fact conservative.
P/E ratios of Google, Apple, Microsoft are all in the 25-30 range, which is not abnormally high. Amazon's P/E has always been wonky because it rarely posts high profits. Nvidia is the current outlier, and I think everyone is in agreement that it is entirely fueled by AI hype.
And Google's rally corresponded to their very successful set of announcements in the AI space at Google IO (and also a profit expectation beat to be fair).
Successful announcements doesn't make an AI company, paying customers do. In zero interest rates you can instead make investor hype your product so they increase the share price, but it doesn't work forever.
> Yep. Like a neural network powered search engine, right?
They've already got that - it's those text snippets. They're quite unreliable, so a reliable one would be different of course.
But Google doesn't get paid to provide search results, they get paid to show ads you click on. It doesn't seem to me this is the same product as AI that shows you text summaries of search results.
Worse, if you mine all the content out of search results instead of making users click on them, why will people even make new webpages for you to show in the results?
I had hoped that it's AI-powered traders make NVDA go up, up, up, so that it produced more GPUs for AI to run on, until it can finally take over the world.
The fundamental reality of everyday people hasn't changed whatsoever. It's getting worse as people get financially drained by higher rents and higher food prices.
None of these recent surges feel sustainable but who knows.
Meanwhile unemployment is at the pre-COVID baseline already, historically low 3-4%, below the traditional 5% "full employment." Real wages (i.e. adjusted for all that inflation) is ALSO above pre-covid levels. https://ycharts.com/indicators/us_real_average_weekly_earnin...
House prices aren't increasing like they were, and the interest rate hike has made it expensive to buy a new house, but overall, it's really hard to claim people are being drained right now. Almost any other time has had worse employment, etc.
If I’m reading the last chart correctly, the real wage is up by about a dollar and a half per week given the timeframe of June 2023 vs Jan 2020.
That doesn’t seem significant and if you look at the shape of the graph it’s trending down from the real wage gains during the height of Covid. December 2020 shows $398 per week while today shows $378 per week, so while it’s still above a pre Covid level of $376 I don’t think this is a good signal of recovery.
So real (inflation adjusted) wages have been roughly static compared to before COVID. That seems a reasonable point to make compared to the OP's negative sentiment, which seems not to be backed up by the numbers.
Unemployment is just as low as before AND wages are just as high as before. That sounds like full recovery to me, and we were in a boom before as well, so that's recovering to boom time levels.
You are making good points by looking at broader indexes HOWEVER note that my previous wages link was adjusted for overall inflation, which includes more than just groceries and rent, so if going by an even broader index, the wages HAVE kept up with inflation, although just barely. Still impressive for wages to do so well even with a very low unemployment rate and suffering through two major shocks (COVID-19 and the food/energy price shock of the Russian invasion of Ukraine) and the Fed’s increase in interest rates to keep inflation from spiraling out of control (due to those two spikes, plus the accumulated effects of years of monetary stimulus to recover from the Great Recession).
>> Over the year, food prices rose 7.4 percent. Prices for food at home increased 6.2 percent since a year ago, with higher prices in all six grocery categories. Prices for food away from home increased 9.5 percent.
I provided a link to the index if you don’t believe me. Retail prices are stubborn to reduce (because retailers are obviously reluctant to sell inventory at a loss which they had bought when prices were high), but a large consumer can access these reduced prices, as you probably can if you bargain aggressively. Here, I’ll paste it again: https://tradingeconomics.com/commodity/lumber
> It's getting worse as people get financially drained by higher rents and higher food prices.
I feel like you could make the argument "wouldn't the stock market not be going up then if this is the case?" Wouldn't people have less free money to spend and therefore corporations would receive fewer of their dollars and post less profits?
Yet profits continue to grow.
aka, yet another reductionist dramatic wrong outlook online that's out of line with reality
We didn't see the productivity advances from the personal computer for 20 years either. It takes a very long time for people to learn how to use new tools.
If you're on this sub reddit you're in bubble. Talk to the 40+ non tech crowd in middle of America. The number of them that have tried and used ChatGPT is going to be shockingly low. Even take the 40+ non tech office worker, my gut says a huge percent has not used chat gpt.
Comments like this make me worried I'm always reading posts from bots and the developer forgot to take out the word Reddit when pointing the bot at HN.
But a human brain fart is probably just as likely.
It took over 4 years for Facebook to hit 100 million users. It took TikTok 9 months to hit 100 million users. ChatGPT hit 100 million users within 2 months.
It doesn't seem to continue to sustain the same explosive growth as TikTok, but to be fair, it wasn't intended to be a full consumer product to begin with.
Yet the chip stocks have been flat for 2 weeks, such as Marvel and Nvidia. But QQQ and others still surging. It's not just an AI boom, but a risk-on tech boom. However, crypto not participating, but keeps falling.
This is why it's so hard to beat the market and why conventional wisdom keep failing: people were expecting high inflation to hurt stocks, or expecting rate hikes to hurt stocks, or bought meme stocks which crashed and burned, or bought crypto instead of stocks. Staying invested in index funds regardless of what the macro situation is tends to produce the best outcome.
Or, it is a viable strategy because enough people are doing it. We’ve seen this with ESG funds for instance. More investors want to invest in ESG funds, because bigger firms decided to. That makes ESG funds go up, and those investors then look like geniuses. Similarly, when a huge portion of the population market buys the S&P 500 every single week, how can it not go up?
Passive investing is good because it's not a strategy you can get crowded out from. As long as the world economy grows, of course - if there's nothing to invest in then you shouldn't invest.
However there are two better strategies than index funds. They are 1. get married and 2. buy a house.
It's hard to beat the market, because people have way too short horizon. Take your example here - it's absolutely meaningless what's up or down or flat over a 2 weeks period...
The reality in the stock market is, that you can make money investing long term (let's say >5 years horizon) in good or great companies, running well a very short term strategy (market making, hft, arbitrage), but usually you cannot do any money when your horizon is somewhere in between. And the issue is, for most people, that's the case....
If you buy/sell a lot then there are also fees, both to brokers and I guess implied fees to market makers. So there are more than 2 parties involved (buyer and seller), and so more than 50% can lose.
There are plenty of no-fee brokerages and market makers arguably narrow the spread.
But it doesn't really matter if the percent who lose on net is 50% or 51% if you're at the 75th percentile. And a large plurality of people are. You don't have to be in the top 0.1% to come out ahead.
The reason for the usual advice is that 50% of people are below average. And then they get mad when the market proves it to them, so the advice that keeps them satisfied is to buy an index fund.
The statistics would be interesting. While 50% of trades are below average, that might translate to a different percentage of trading entities. (like 5 drunk idiots and one sober professional playing poker in a casino)
A fool and his money are soon parted. There may be people who show up to the casino drunk, and that can enrich quite a number of other patrons, but then they go home bankrupt and have nothing to play with tomorrow. The steady-state number of drunk idiots is bound to be small because they're self-eliminating.
Some of the people who try to beat the market do actually lose their money. You can go play games with options trading or short selling or high volatility stocks and not just get 1% instead of 7%, you can lose the majority of your principle. Or all of it. Or even end up in debt.
Not a huge difference here. But it is lower. The difference really shows up when you start seeing losses. The extreme case of one year with 100% loss demonstrates things.
Do you have any reason to believe that to be true? It could just as easily be the other way. One big fat idiot can lose all their money to a large number of people who then each beat the market by a small margin.
I think it's pretty common knowledge that most funds and stock pickers underperform the benchmarks. I think for retail investors the ballpark figure is like 90% underperformers.
Warren Buffett took a bet in 2008 that over the next 10 years, a low cost S&P 500 index fund will outperform active hedge funds - and it did.
Fund managers are a different kind of thing, because it's a principal-agent problem. The fund manager has different incentives than the client. He wants to get a bonus, so he takes risks consistent with the structure of his bonus contract even if they're not aligned with the interests of the investor. It's not surprising that underperforms, it's a textbook perverse incentive.
But people often get ahead by understanding an industry. For example, when Stable Diffusion became available last year, someone who was paying attention might have noticed that it was likely to become popular and spike demand for GPUs to run it on. If that person went out and bought some shares of NVDA or AMD at that point, they'd be happy with where it is today compared to an index fund.
But a major index fund is unlikely to temporarily change the ratio of those companies in the index in response to that kind of information, so the higher returns are only available to people who are paying attention and willing to take the risk with their own money.
I completely agree that it is possible to beat the market - it's just that it's very difficult, mostly due to misaligned time horizons.
Take your insight here about NVidia - it's false. So far, GPUs sales DID NOT increase, at least not significantly. Go check NVidia sales for past 4 quarters. They said they expect them to increase significantly in the next quarter. Even if it does, and even if it doubles what they say, the valuation of the company is still in the bubble territory.
Another great example is Tesla - stock surged on anouncement that GM will use their chargers. When you look at the numbers, they will make an insignificant money on that (optimistic scenarios are between 3-10 billion $, by 2030 !) - yet the stock added more capitalization than ... the entire captialization of GM !
Now, if you say that NVidia has a huge business moat that is untouchable for the next 5 years - that's a different story.
> Take your insight here about NVidia - it's false.
That seems inconsistent with:
> They said they expect them to increase significantly in the next quarter.
The beating the market thing is the thing where you figure it out before other people and buy before the price goes up. Or figure out what people will think will be the case in the future.
Even if their sales don't go up at all, because large numbers of people now expect them to, someone who came to that conclusion earlier and bought the stock last year will have beat the market between then and now.
> Even if it does, and even if it doubles what they say, the valuation of the company is still in the bubble territory.
Tech valuations always include the potential for growth. When you make a lot of money and have a hot product to leverage into dominance in other market segments, you have more growth potential.
Microsoft now makes more revenue from Azure than Windows. But the reason for that is Windows. They can give you a VM with Windows without paying anyone else for a license, which is a competitive advantage that gets them a huge chunk of a market which is bigger than Windows itself.
That is never guaranteed, but the potential for it increases valuations. Then sometimes they crash. But sometimes they go up more, because the potential actually pans out.
> Another great example is Tesla - stock surged on anouncement that GM will use their chargers. When you look at the numbers, they will make an insignificant money on that (optimistic scenarios are between 3-10 billion $, by 2030 !)
Because it's not about making money on chargers. If more companies use their charging standards, more places will install their chargers because there will be more customers with cars that can use them. With more chargers, more people will find it viable to buy an electric car. Then they sell more cars.
And it's the same kind of thing. The valuation includes the potential for growth. Now Tesla is selling a lot of cars, which they're making batteries for, so they're gaining expertise in making cost-effective batteries. If the batteries get cheap enough, they won't just be selling them in cars, it will make Powerwalls and grid storage cost-effective, and that's a big potential market.
There is no guarantee this happens, but the potential for it increases their valuation.
Again, the numbers don't add up. It's an illusion - you can project this kind of growth for small companies, not for huge companies. Maybe if aliens come down to earth to buy some GPUs next year.
Same for Tesla - for those projections to be true, they would need to be making more cars than any other car maker, and soon. It's not even close to happening. I'm not saying that to diminish their achievements - which are truly unbelievable ! But their valuation reflects almost impossible things.
Fun fact for Tesla - Tesla is mostly buying batteries for their cars from other battery makers, not making them ! Tesla is very deceptive about what they do, and what they don't. Knowing that they are a just buying batteries and not making them, change your opinion about batteries making profit potential for Tesla ?
> It's an illusion - you can project this kind of growth for small companies, not for huge companies
Google's revenue is at more than 500% of what it was a decade ago. Amazon 800%.
> Knowing that they are a just buying batteries and not making them, change your opinion about batteries making profit potential for Tesla ?
It's their purchasing capacity that matters because it's what justifies the amount it makes sense for them to spend on R&D (and provides the revenue they have to do it with). The factories that produce more cost-effective future batteries can't have been built yet anyway if the technology is still under development.
I'm sorry but how this second answer relates to my question ?
You said that selling a lot of cars is good since they gain experience in making cost-effective batteries, and hence can sell other profitable things - not only cars.
I just pointed to you that it's not Tesla which is doing it - it's other companies ! Yet, somehow, you seem to ignore that little detail :)
Nothing, because the AIs will tell you to invest in low cost passive index funds. Mainly because it's correct but also because the AIs will be certified financial advisors and will tell you what any of them would.
"Regular traders" are gamblers whose job is to give market-makers their money in trade fees.
You're providing price information anytime you buy a fund that's choosier than VTSAX. Conversely, if your opinion is the tech sector will go up and so you buy NVDA instead of a tech sector index fund, you've bet more than you intended to.
The AIs "regular traders" will have will be the same ones as one other, so they'll make similar recommendations, so they'll be priced in.
But they'll make similar recommendations to many people, so those stocks will go up, and people will think it's working. Then some new AI will be released that makes different recommendations and the stocks artificially inflated by the obsolete AI will crash. People will say that you need the latest AI or you'll be left behind.
This is not a new thing. It's how every commodified stock-picking mechanism works. By the time retail investors have it, you're already inside a bubble.
Good question. Depends if regular means institutional non-algorithmic traders or retail. Most traders even in hedge funds are not trading using a machine as per se.
I think at the moment a lot of old-er financial people are quite sceptical of complicated black-box models.
AI could be a huge win in the sense that you could say "When has this bond future been in [conditions] like now and what happened". The potential for organising information is fantastic.
So how much stock trading will be CONTROLLED by AI models soon? What if it pushed prices higher and higher? Or what about Armageddon where some “hallucination” triggers a major financial crisis?
So.... I'm guessing if the AI messes up spectacularly, or if some reddit group manages to trick it to overinflate some penny stock, the stock markets will undo all the trades, so that billionaires don't lose a few million?
Unlikely. The trades that caused KCG to collapse [1] were not reversed (~$400m in losses).
Any firm worth their salt has risk systems in place to prevent runaway trading too, and those aren’t black boxes like AI/ML. They’re limits set for specific strategies or teams etc, and typically require approval from firm partners to increase past certain levels.
Collapses of firms are far more often caused by lapses in proper risk management than bugs in code. The KCG collapse looks like a bug on the surface but was ultimately a misuse of accounts that sidestepped these risk systems, so they couldn’t stop the runaway caused by the bug.
I think the major mistake in your statement is that the billionaires would lose more than a few million. But yes, they have reversed trades when people take advantage of flaws in automated market-marking scripts.
When were trades reversed when a market maker had a bad algo? If you are doing market manipulation, sure, your trades might get reversed, but if someone wants to puke money across the tape it's absolutely legal to take it.
I'm not able to find the story now, but there was a European (UK?) youngish person (teen?) who took advantage of bad market maker code to make hundreds of thousands. Those trades were reversed. The trades were under US jurisdiction.
