AI Investments Under Scrutiny: Wall Street's $2 Trillion Reckoning

Wall Street's $2 Trillion AI Reckoning

On July 16, the S&P 500 index, one of the most widely cited benchmarks in American capitalism, reached its highest-ever market value: $47 trillion. Of those 500 publicly traded companies, just seven of them made up a third of that valuation. To put it another way, 1.4 percent of those companies were worth more than $16 trillion, the greatest concentration of capital in the smallest number of companies in the history of the U.S. stock market. The names are familiar: Microsoft, Apple, Amazon, Nvidia, Meta, Alphabet, and Tesla. They are all Silicon Valley, if not by address than by ethos. All of them, too, have made giant bets on artificial intelligence, hoping that the new technology will target better ads (in the case of Meta's Facebook and Instagram), make robotaxis a possibility (as per Elon Musk), or, in the case of Nvidia, just make the chips that allow the technology to run in the first place. For all their similarities, these trillion-dollar-plus companies have been grouped together under a single banner: the Magnificent Seven. In the past month, though, these giants of the U.S. economy have been faltering. A recent rout led to a collapse of $2.6 trillion in their market value -- which, as one Twitter commenter pointed out, represents the entire market cap of Nvidia, which for a brief moment a couple of weeks ago was the most valuable private company in the world. There has been bad news all around. For example, Tesla's new self-driving future seemed a lot like its old self-driving future -- that is, a big promise that seems unlikely to come anytime soon, if at all. And Microsoft, which owns a large minority stake in OpenAI, reported that its AI cloud-computing business hadn't grown as much as investors had expected. This steep decline in the Magnificent Seven stocks might seem like a clear signal that Wall Street has already become disenchanted with AI, that the thesis it would revolutionize industries and create a massive productivity boom anytime soon may not be such a sure thing. And that is true -- at least to a point. Wall Street seems to be coming to grips with the fact that AI is the kind of industry that has great marketing already built into the name. It's like saying you work in "cures" -- sounds great, if it works. Clearly, ChatGPT shows that the technology is viable. But the worst scenarios, which involve mass layoffs and a sudden concentration of political power, have also not come to pass. AI hasn't really replaced a significant number of jobs, and in the cases where it has, employers have ended up hiring people back anyway. (Let's set aside the hyperbolic predictions around Matrix-like scenarios or superintelligent computers.) That has led to something of a vibe shift. It is commonplace now to denigrate something mediocre or sloppy as having been created by AI. Earlier this year, Goldman Sachs issued a deeply skeptical report on the industry, calling it too expensive, too clunky, and just simply not as useful as it has been chalked up to be. "There's not a single thing that this is being used for that's cost-effective at this point," Jim Covello, an influential Goldman analyst, said on a company podcast. AI is not going away, and it will surely become more sophisticated over the next few months, to say nothing of the long-term potential. This explains why, even with the tempering of the AI-investment thesis, these companies are still absolutely massive. When you talk with Silicon Valley CEOs, they love to roll their eyes at their East Coast skeptics. Banks, especially, are too cautious, too concerned with short-term goals, too myopic to imagine another world. So what if it's not cost-effective? It's the future! Be that as it may, public companies rely on public dollars, and Wall Street has taken an about-face on its winners-take-all strategy. Another index of smaller companies, the Russell 2000, has risen by more than 11 percent amid the Magnificent Seven's rout. In terms of dollars and cents, that comes out to be about $300 billion, or less than 2 percent of the Magnificent Seven's peak valuation. But it signals that there is something much bigger going on. This is a broad base of companies, like consumer brands including E.l.f. Beauty and Abercrombie & Fitch, which simply don't have as much capital to do anything effective with AI or where the technology is beside the point. Look -- nobody is going to invest in a company just because it doesn't use AI. Wall Street has not gone Luddite all of a sudden. What's happening here comes down to what Covello was talking about: the boring but necessary work of deciding what is cost-effective.

AI: Hype Machine or Hidden Gem? The Great Tech Debate And What It Means For Your Wallet

AI has been widely touted as the way of the future. Major tech firms are investing billions in developing AI, while some scientists working on it have signed an open letter warning of its dangers. On the other hand, the average American is left worrying if AI will replace their job. Most people are far more worried about losing a job than AI becoming a monster that could put any Sci-Fi movie to shame. Don't Miss: America's construction sites are desperate for Robots -- here's how to invest in a house-printing startup who's making them and be a part of a $16 trillion industry. A billion-dollar investment strategy with minimums as low as $10 -- you can become part of the next big real estate boom today. In a recent episode of NPR's The Indicator from Planet Money, hosts asked the same question: Is AI all it's cracked up to be? And is it actually after your job? First, the logical arguments. Host Greg Wrozowski makes the same arguments many of us tell ourselves: AI isn't truly intelligent. Instead, it's a sophisticated way of aggregating internet content rather than genuine intelligence. It can't replace human creativity and true reasoning (although with basic mathematical functions, in particular, AI can come close). More alarmingly, AI often produces false information. The industry calls these errors "hallucinations," But they occur in 3-27% of responses. And most importantly, AI is incapable of replacing most human jobs. For example, attempts at automating drive-thru orders failed miserably. See Also: Don't miss out on the next Nvidia - you can invest in the future of AI for only $10. Experts concur, with MIT economist Daron Acemoglu, one of the leading economic scholars of technology, stating that AI's impact on the economy in the next decade will be limited. When asked if we should expect AI to usher in revolutionary changes for the economy in the next decade, he replied, "No. No, definitely not. I mean, unless you count a lot of companies over-investing in generative AI and then regretting it as a revolutionary change." Experts like Acemoglu aren't afraid to mince words, calling AI a glorified photocopier passing human work as its own or a copycat. In addition, in many cases, AI is copying or reformulating copyrighted material. At least 15 high-profile lawsuits against AI companies asserting copyright infringement have been filed. Trending: Commercial real estate has historically outperformed the stock market, and this platform allows individuals to invest in commercial real estate with as little as $5,000 offering a 12% target yield with a bonus 1% return boost today! What about jobs? According to Acemoglu, AI will affect less than 5% of human tasks in the economy. Other experts suggest that AI could help automate the most tedious tasks in most industries rather than replace humans entirely. And we can expect AI to barely touch many sectors, like construction and food service. So your job is safe for now, but should you invest in AI? That discussion is more murky. AI may not significantly boost productivity or economic growth in the near future. Whether AI will improve exponentially depends on the infrastructure costs to keep up with data needs. If not, developers could experience substantial slowdowns due to data limitations and cost restrictions. On the other hand, AI might still develop in unexpected ways that lead to exponential growth and significant gains in as little as a few years. Is AI a hidden gem? It could be, eventually. But for now, don't underestimate human capabilities and our own ability to learn and adapt before assuming computers have it all figured out. Read Next: Here's the AI-powered startup that turns traders into influencers achieving 12% monthly growth - invest in it at only 10 cents per share. Don't miss the real AI boom - here's how to use just $10 to invest in high growth private tech companies. Market News and Data brought to you by Benzinga APIs

AI investors want to see it monetized now, strategist says

Emily Roland, co-chief strategist at John Hancock Investment Management, spoke with Quartz for the latest installment of our "Smart Investing" video series. Watch the interview above and check out the transcript below. The transcript of this conversation has been lightly edited for length and clarity. ANDY MILLS (AM): So there's a theory that OpenAI could lose as much as $5 billion this year and could be headed to bankruptcy by next year. Do you think there's any credence to that? Should the investors in the AI boom be worried? EMILY ROLAND (ER): Look, we think we're in the early stages of AI adoption. It's got many years to go in terms of implementation. I think what investors are concerned about right now is how is it being monetized? It's the 'show me' moment as far as AI and the tech sector goes. And I think that's one reason that we've seen some challenges around earnings season. The earnings are still there, but again, investors really wanna see how this is being shown up in sales growth and monetization. So when we think about AI, we're still overweight mega-cap tech. These are high quality companies. They have tons of cash, they have great return on equity. They have a limited need to tap the capital markets in order to grow, which is a huge advantage in an environment where interest rates are at 5.5%. The challenge, of course, is in the valuation. So a lot was in the price going into this earnings season. And now the S&P 500 growth index, which is where a lot of those companies live, is trading at almost a 50% premium to its 20-year average. You know, valuations are not necessarily a catalyst. We can see them continue to expand here, but we wanna diversify also from that mega cap tech names by owning things that are on sale. And right now we're really focused on quality at a reasonable price. I think we've made that term up, I'm not entirely sure, but it's really focused on looking for parts of the market that are on sale. AM: So what's on sale? ER: Well, we like areas like mid-cap value stocks, industrials in particular. So there's another trend that's happening right now that's kind of more under the surface, which is one of onshoring, reshoring. There's manufacturing happening in the United States today that's a result of supply chains being moved back here from China and other parts of the world. It was a trend that was in place prior to Covid that's really been accelerated, especially in the light of the fact that we're doing a ton of fiscal spending on manufacturing. Whether it's things like the CHIPS Act, the Infrastructure and Jobs Act -- all of those things are being funneled into this kind of manufacturing renaissance that we're seeing in the United States today. And we look at industrial stocks as really being kind of the key beneficiary of those trends. So think mid-caps, Midwest, which is where we're seeing a bulk of this activity happen. And it's a longer term secular trend that you're not overpaying for. In fact, mid-cap equities are trading at the steepest discount to their large-cap counterparts since the late 1990s. So we think there's a nice opportunity there. AM: Earnings season is underway and a lot of the big tech companies are getting punished for missing, and punished more than usual, are mid-caps the place to go for safe harbor in these moments? ER: Yeah. We certainly think that's one opportunity to diversify away. And let's face it, mid-cap or mega-cap tech is probably due for a breather. There's been a huge run-up. Tech stocks are up 33% over the past year, far better than the broad market. Some of those Magnificent Seven, or I guess you can call them the 'lag seven' right now, not the 'Mag Seven,' have seen a huge run-up in price. So the expectations are very high. The bar is very high. Trying to come up with an Olympics analogy for us right now. But the bar is tough to overcome. So we wanna think about, again, diversifying from that mid-caps or one spot to do that. We've seen a huge rotation into small cap equities. We can talk about that. We would probably fade that. We think a lot of that is sentiment driven and driven from kind of expectations of a shift in the political regime right now. But again, mid-caps really being the sweet spot in terms of playing that rotation.

AI spending is in the crosshairs in a 'make-or-break' week that determines where Big Tech heads next

Key earnings reports from the biggest technology giants this week could set the tone for the market in the near term as Wall Street searches for signs that hefty AI investments are reaping rewards. Underwhelming Alphabet and Tesla results sparked a brutal sell-off, prompting questions about how long it will take for the AI narrative to come to fruition. Last Wednesday's session saw the biggest drop in the S & P 500 and tech-heavy Nasdaq Composite since 2022, resulting in a more than $750 billion loss in value among the "Magnificent Seven," Morgan Stanley's sales desk said. The Roundhill Magnificent Seven ETF (MAGS) currently sits 11% off its highs. MAGS YTD mountain Magnificent Seven ETF performance This backdrop sets the tone for a "make or break week" coinciding with the Federal Reserve's July rate decision Wednesday, according to Wolfe Research's Chris Senyek. Microsoft reports Tuesday, followed by Meta Platforms Wednesday and Amazon and Apple after the bell Thursday. Last week's action puts the microscope on AI spending. For months, tech giants have flaunted their AI plans and ambitious visions. Now, more than 18 months after the launch of groundbreaking ChatGPT, Wall Street wants results. "We expect them to have solid earnings. We expect them to beat their EPS," said Jay Woods, chief global strategist at Freedom Capital Markets. "Major focus now turns to AI demand -- that they're spending to meet that demand, and will eventually see benefits from that spend." The rush to compete has created a fear of missing out mentality. Alphabet CEO Sundar Pichai noted during an earnings call that "the risk of underinvesting is dramatically greater than the risk of overinvesting." But most of the revenue gains from AI have so far materialized within the cloud businesses responsible for training and running large language models, while returns elsewhere appear "more qualitative," notes Deutsche Bank's David Folkerts-Landau. "Tech firms are competing to lead the AI race because the high costs, scarce semiconductor resources and speed of progress make investment a zero sum game," the group chief economist wrote in a Tuesday note. "There is only likely to be space for a couple of champions. Whoever blinks for a second could risk falling light years behind everyone else." So as the companies continue to funnel hoards of cash into AI projects, Baird's Ted Mortonson expects a delayed reward until 2025 or 2026. An ongoing sell-off? Some Wall Street analysts believe strong quarterly results may not be enough to reverse the pullback in tech shares. "We believe the recent market rotation still has room to run with the Fed overwhelmingly expected to cut rates at least 25 [basis points] at the Sept meeting and/or a possible Trump win on November 5th -- combined with investors still over-owning mega-cap technology stocks," Senyek wrote. GOOGL 5D mountain Alphabet shares over the last five days Failure to hit estimates or post a "monster beat" could contribute to ongoing consolidation, which would keep stocks trading in a tight range, according to Woods. Seasonal rotation may also factor into some volatile action from here, he added. At the same time, the recent sell-off may also lower expectations for these companies with already-high forecasts, T. Rowe Price portfolio manager Dominic Rizzo told CNBC's " Closing Bell: Overtime " on Monday. "I do think the bar's come down," he said. "My gut is that the tech earnings are going to come in better than people expect."

Elon Musk Says Tesla Now In A Similar Position Nvidia Was In Before Its Stock 'Went Bananas' - Thinks Strong AI Companies Will Dwarf Others

Elon Musk recently spoke at an event, sharing his thoughts on Tesla's future and the impact of artificial intelligence (AI). He compared Tesla's current situation to Nvidia's before its stock surge, predicting that companies strong in AI will dominate the market. Don't Miss: America's construction sites are desperate for Robots -- here's how to invest in a house-printing startup who's making them and be a part of a $16 trillion industry. Don't miss the real AI boom - here's how to use just $10 to invest in high growth private tech companies. Musk explained that Tesla is on the brink of significant growth, similar to Nvidia, saying, "I do feel like maybe ... Tesla's kind of in a phase right now, like similar to what Nidia was in before ... Nvidia stock went bananas." He also praised Nvidia CEO Jensen Huang, saying, "I have to say like Nvidia deserves the valuation ... they've got ... Jensen and his team have done an amazing job." However, he emphasized that companies with strong AI capabilities will see their value increase more than those without. "Any kind of AI company that is strong in AI is just going to be crazy." See Also: Don't miss out on the next Nvidia - you can invest in the future of AI for only $10. Full Self-Driving Technology A major part of Tesla's AI strategy is full self-driving (FSD) technology. Musk stressed how this could change car usage because, according to him, cars are used about 10 hours a week, but with self-driving, they could be used up to 168 hours a week. "That would be a 10x increase in the productivity of the car, but it costs the same," Musk said before continuing, "You go from ... 20, 25% margins to 90% margins. It's insane." He went on to explain that when cars can drive themselves, Tesla owners could make money by sharing the car's earnings. In other words, your car could give rides to people when you're not using it, and you would get a portion of the money it makes. This extra income could be much more than what you pay for your car loan or lease and is in line with previous Musk statements on the subject. See Also: Here's the AI-powered startup that turns traders into influencers achieving 12% monthly growth - invest in it at only 10 cents per share. Humanoid Robots Musk also discussed Tesla's humanoid robot, Optimus. He believes these robots could become important in different industries and homes. "The market for humanoid robots is in excess of 10 billion units," Musk said, predicting high demand for these robots. "[That's] more than the number of humans because people will each want one, and then there'll be others that are involved in industry ... if they do sell even at a volume for $20,000, that's $20 trillion, so it's like I mean it's just bananas numbers," further explained the Tesla CEO. Trending: If there was a new fund backed by Jeff Bezos offering a 7-9% target yield with monthly dividends would you invest in it? The Problem With Musk's Predictions While Musk is optimistic about Tesla's future and AI's potential, there are several reasons his predictions might not come true. First, there are regulatory hurdles. Getting approval for fully self-driving cars involves complex rules and regulations, which can delay or even stop the widespread use of self-driving cars. Second, there are technical challenges. Creating AI that is reliable and safe for self-driving cars and robots is very difficult. Any setbacks in this area could slow down Tesla's progress. Third, there is market competition. The AI field is very competitive, with many companies investing a lot of money. Tesla will face strong competition from other tech giants and startups. Finally, economic factors play a role. Economic downturns or changes in the market could impact Tesla's stock and overall growth. Read Next: These five entrepreneurs are worth $223 billion - they all believe in one platform that offers a 7-9% target yield with monthly dividends Don't miss the real AI boom - here's how to use just $10 to invest in high growth private tech companies. Market News and Data brought to you by Benzinga APIs