Nvidia CEO Jensen Huang’s Optimism and AI’s Impact on Investors
Investors have been captivated by the recent success of Nvidia Corp., a leading chip maker in the artificial intelligence (AI) industry. The company’s CEO, Jensen Huang, has declared that AI has reached a “tipping point” and is set to go mainstream. This announcement has sparked a debate among investors about the impact of AI on the economy and whether they should shift their focus from traditional economic indicators to technological advancements.
The recent blowout earnings of Nvidia have led to a surge in stock prices, pushing them to new all-time highs. Despite concerns about resurgent inflation, investors are now questioning whether they should worry about the economic cycle and Federal Reserve interest rate cuts. Instead, they are considering embracing a rally led by technology stocks, which is starting to broaden out to other sectors. The potential for advances in AI to boost productivity and lift corporate profits while capping inflation pressures is an enticing prospect for investors.
However, experts caution against getting too carried away with this optimistic outlook. Michael Arone, chief investment strategist at State Street Global Advisers, believes that investors will still obsess over inflation metrics. The Federal Reserve’s favored inflation metric, the core reading of the personal-consumption expenditures index, is due to be released soon. If inflation does not resume a downward trend towards the central bank’s 2% target, market volatility could be on the horizon.
Investors initially priced in six to seven quarter percentage point rate cuts for 2024 but have adjusted their expectations based on recent data and the Federal Reserve’s response. The current consensus is that rate cuts will likely begin in June and that there will be only three or four cuts by year-end. However, if inflation becomes a persistent issue, investors may have to consider the possibility of no rate cuts or even rate hikes.
Despite these concerns, Arone remains optimistic about the rally continuing to broaden out. He sees opportunities for investors to build exposure to small-cap and value stocks. The past week has already seen strength in sectors outside of tech and consumer services, indicating a potential shift in market dynamics.
The tech-heavy Nasdaq Composite briefly flirted with its first record close in more than two years, reflecting the ongoing dominance of the tech sector. Nvidia, along with other AI beneficiaries, led a stock-market rally in 2023 that was increasingly concentrated. Christopher Wood, global head of equity strategy at Jefferies, believes that Microsoft’s investment in OpenAI was a catalyst for the AI thematic to start driving market psychology. This shift has given the tech sector a new secular story, rather than a cyclical one.
However, some experts warn that the current rally in tech stocks is reminiscent of the dot-com bubble of the late 1990s. The stock market’s year-to-date rally has been largely driven by big one-day gains in the tech sector. While investors may be willing to accept higher interest rates if there are promising developments in important sectors like AI, the sustainability of this growth paradigm remains uncertain.
Thierry Wizman, global FX and rates strategist at Macquarie, points out that previous “new paradigms” about U.S. productivity growth have not always panned out. He emphasizes that what matters is not whether the AI-driven paradigm will succeed but whether people believe it will succeed. A change in macro dynamics could occur if there is a widespread belief in the potential of AI, leading to a reevaluation of the neutral rate and possible interest rate hikes.
While Huang’s optimism about AI has energized bulls and driven Nvidia’s quarterly results, skeptics remain cautious. Jose Torres, senior economist at Interactive Brokers, highlights that the practical aspects of AI have yet to support aggregate profits for companies outside the tech sector. Only time will tell if Huang’s optimism is warranted, and whether AI is more than just fluff.
In conclusion, Nvidia’s CEO Jensen Huang’s optimism about the impact of AI on the economy has sparked a debate among investors. While there is excitement about the potential for AI to boost productivity and corporate profits, concerns about inflation and the sustainability of the current rally persist. Investors are eagerly awaiting the release of inflation metrics to gauge the future trajectory of the market. The role of AI in driving market psychology and broadening the rally remains uncertain, but its potential impact cannot be ignored.
