The Impact of AI on Stock-Market Investments: A Closer Look at its Potential and Relevance in Relation to the Fed

The Impact of AI on Stock-Market Investments: A Closer Look at its Potential and Relevance in Relation to the Fed

In the world of stock-market investments, there seems to be a growing fascination with artificial intelligence (AI) and its potential impact. This interest has been further fueled by the recent success of chip maker Nvidia Corp., led by its CEO Jensen Huang. As Nvidia reported impressive earnings that exceeded expectations, technology stocks soared to new all-time highs. This has led investors to question whether they should be more focused on the advancements in AI rather than the economic cycle and Federal Reserve interest rate cuts.

Huang boldly declared that the AI industry has reached a “tipping point” and is ready to go mainstream. This statement has sparked excitement about the potential for AI to bring about a generational boost in productivity, leading to increased corporate profits and a cap on inflation pressures. However, experts caution that this optimistic scenario may not come together seamlessly.

MarketWatch interviewed Michael Arone, chief investment strategist at State Street Global Advisers, who believes that investors will continue to 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 the data shows inflation trending towards the central bank’s 2% target, it will provide some reassurance. However, if inflation appears to be climbing or becomes a cause for concern, market volatility could be on the horizon.

Investors had initially priced in multiple interest rate cuts for 2024, but as the data came in and the Fed pushed back on those expectations, the outlook has shifted. The current expectation is for rate cuts to begin in June and for only three or four cuts to occur by year-end. However, if inflation remains stubbornly high or continues to rise, investors may need to consider the possibility of no rate cuts or even a rate hike. Such a scenario could have a significant impact on stock prices and Treasury yields.

Despite these potential challenges, Arone remains optimistic. He believes that the recent rally in technology stocks will continue to broaden out to other sectors, providing opportunities for investors to build exposure to small-caps and value stocks. Last week saw strength in sectors outside of tech and consumer services, indicating a potential shift in market dynamics.

The rally in technology stocks, led by Nvidia and other AI beneficiaries, has been compared to the dot-com bubble of the late 1990s. The investment in ChatGPT-maker OpenAI by Microsoft was seen as a catalyst for the AI thematic to start driving market psychology. However, some experts caution that not all “new paradigms” about U.S. productivity growth have panned out in the past. The sustainability of high productivity growth remains uncertain, but what matters is whether people believe in the potential of AI to change macro dynamics.

While investors are hopeful about the future of AI and its impact on leading technology providers, the practical aspects of AI have yet to fully support aggregate profits. Many companies outside the tech sector continue to offer cautious guidance. Only time will tell if Jensen Huang’s optimism about AI is warranted, and whether it will prove to be more than just fluff.

In conclusion, the impact of AI on stock-market investments is a topic of great interest and debate. While the recent success of technology stocks has been driven by advancements in AI, investors should remain cautious and keep an eye on inflation metrics and Federal Reserve actions. The future of AI remains uncertain, but its potential to revolutionize various sectors and drive productivity growth cannot be ignored.