AI Makes a Statement

Telemus Weekly Market Review May 22nd - May 26th, 2023

After experiencing some mild downward pressure as concerns around the debt ceiling lingered, stocks finished the week on a high note. The catalyst was notable news out of NVIDIA Corp. as they projected revenues for the upcoming second quarter were going to be roughly 50% higher than the market expected. NVIDIA makes semiconductor chips that are used in data center platforms to support, among other things, artificial intelligence (AI) applications. 

As 2023 has progressed, artificial intelligence has become a top theme for many growth stock investors. Open architecture tools such as ChatGPT have enabled mainstream use of AI functionality and have many considering broader commercial uses. The open-source nature of programs like ChatGPT is noteworthy as it will lower the cost of use and foster an acceleration in mainstream adoption. Ultimately this should help to reduce the time needed to train AI systems. 

While the milestones that have occurred around AI thus far this year are not to be downplayed, it is worth noting that AI is not a new phenomenon and has been advancing for some time. In the manufacturing sector, the machine learning component of AI has been used in quality control applications to identify products with defects on assembly lines. In corporate functions, robotic process automation, or RPA, has been deployed through ‘bots’ that have taken on repetitive tasks in back-office functions. Even news services, such as Bloomberg, have been using AI for years to summarize key points from a variety of news and data sources. 

As we look ahead, AI technologies are likely to help drive efficiencies in other professions. A common expectation is that AI will help improve efficiency of coders not just by streamlining how they write code but also helping to limit bugs. Other occupations such as customer service representatives, writers and clerks may be aided by AI functionality. 

As we look at the investment case around AI, we must be reminded that the market has a history of identifying noteworthy innovations, however, it often underestimates the pace at which change will occur. From an economic standpoint, open architecture AI platforms don’t yet have business models that offer sizable revenue streams. The markets expectation at this point is that the large technology companies, such as Microsoft and Google will be key beneficiaries of broader AI technology adoption. However, there remains considerable ambiguity around where the economic value is derived, at what scale, and who ultimately benefits. 

To date, investor behavior has been fueled by a mix of following strong fundamental performance along with a dash of fear of missing out behavior. The price appreciation of seven large technology driven stocks, who we refer to as the TANMAMA group (Tesla, Amazon, NVIDIA, Microsoft, Amazon, Meta and Alphabet) have accounted for approximately three-quarters of the S&P 500’s 10.3% return year-to date. This dwarfs the 0.4% return of the S&P 500 equal weighted index, which is a barometer of the average stock in the index. There are clearly justified reasons for this divergence. The significant surge in business that NVIDIA is experiencing is a sign of investment in artificial intelligence and the promise that technology companies believe AI holds. In addition, the revenue and earnings growth rates of the TANMAMA stocks, while decelerating, continues to outpace the broader market. 

Going forward, we think there will be a bit more balance to growth stocks than what has been experienced over the last few months. While the opportunity and excitement of AI warrants investor interest, there remains opacity around how the technology will ultimately evolve. 

All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Telemus Capital cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. Investment decisions should always be made based on the client's specific financial needs, goals and objectives, time horizon and risk tolerance. Current and future portfolio holdings are subject to risk. Risks may include interest-rate risk, market risk, inflation risk, deflation risk, currency risk, reinvestment risk, business risk, liquidity risk, financial risk, and cybersecurity risk. These risks are more fully described in Telemus Capital's Firm Brochure (Part 2A of Form ADV), which is available upon request. Telemus Capital does not guarantee the results of any investments. Investment, insurance and annuity products are not FDIC insured, are not bank guaranteed, and may lose value. Any reference to an index is included for illustrative purposes only, as an index is not a security in which an investment can be made. Indices are unmanaged vehicles that serve as market indicators and do not account for the deduction of management fees and/or transaction costs generally associated with investable products.  The S&P 500 index includes 500 leading companies in the US and is widely regarded as the best single gauge of large-cap US equities.

Advisory services are only offered to clients or prospective clients where Telemus and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Telemus unless a client service agreement is in place.