Assessing the ‘All Things AI’ Rally

Many professional investors are asking this week what keeps the market in a sustainable uptrend after such a strong move higher the past two months.

It is key economic data, bullish forward sales and earnings guidance that comes in at or better than Wall Street is forecasting that supports the case for further gains. Of the stocks that make up the Magnificent Seven, only Tesla Inc. (NASDAQ: TSLA) has reported quarterly results, missing on both the top and bottom lines while providing opaque guidance, with the stock trading down on the news.

Based on Wall Street’s channel checks, it appears as if the other six Magnificent Seven companies will post strong results. As to whether they satisfy the Street will wholly depend on forward guidance.

One would think that there will be a replacement in the Magnificent Seven for Mr. Musk’s electric vehicle (EV) company, of which there are a couple of heavyweights that come to mind. But again, we’ll see after earnings season which company occupies that slot.

U.S. stocks traded to new record highs last week, as stronger-than-forecast Q4 earnings were posted by a few mega-cap technology stocks coupled with investors’ increasing optimism around artificial intelligence (AI). There is the growing belief that the amazing demand for AI chips from the hyperscalers is just the beginning of a multi-year transformation of nearly every industry in the economy. This growing bullish sentiment surrounding AI is, in my view, legit and supported by emerging data regarding its application.

Some argue that AI is a bigger transformation than the internet, since it can affect every aspect of human life and society from health care to education to entertainment. Others contend that the internet is still more transformative because it enabled the global connectivity and information access that made AI possible in the first place. But there is little argument that the application of AI on businesses will have huge positive impacts on productivity and efficiency while being enormously accretive to global gross domestic product (GDP).

According to estimates published by McKinsey, “AI could add up to $13 trillion to the global economy by 2030, which is comparable to the impact of the internet in the past two decades. AI could also boost productivity by up to 40% and generate up to $9 trillion in annual value from innovation. However, AI also poses significant challenges and risks, such as ethical dilemmas, job displacement and security threats that require careful governance and regulation.”

As generative AI has received most of the early publicity, the greater and more impactful changes will be created from Machine Learning (ML) AI. When I typed “What will AI bring to businesses?” in ChatGPT, this is the answer it provides:

“Artificial intelligence (AI) is transforming businesses in many ways, such as improving efficiency, productivity, customer service, cybersecurity, fraud management and content production. AI can also help businesses make better decisions, reach larger audiences and customize their offerings. Here are some examples of how AI is used in different business domains:

• Customer service: AI-powered chatbots can provide instant and personalized responses to customers’ queries, reducing the need for human agents and increasing customer satisfaction. AI can also analyze customer feedback and behavior to improve products and services.
• Cybersecurity and fraud management: AI can detect and prevent cyberattacks, malware, phishing and other threats by analyzing large amounts of data and identifying patterns and anomalies. AI can also help businesses verify identities, authenticate transactions and monitor fraud risks.
• Content production: AI can generate high-quality and engaging content for various purposes, such as marketing, internal communications, product descriptions and social media posts. AI can also translate content into different languages and optimize it for search engines and audiences.
• Inventory management: AI can optimize inventory levels, reduce waste and increase sales by forecasting demand, managing supply chains and recommending products. AI can also automate tasks such as ordering, tracking and replenishing inventory.
• Recruitment and talent sourcing: AI can help businesses find and hire the best candidates by screening resumes, conducting interviews and assessing skills and fit. AI can also improve employee retention, performance and satisfaction by providing feedback, training and career development opportunities.”

Businesses will need to be agile, adaptable and responsible in using AI to create value and competitive advantage. It should be of no surprise that early adopters of AI to their business models are thought to result in market share gains and is why companies are racing to deploy AI in all its forms. Take the manufacturing of goods. There are different types of AI that are used for manufacturing, such as those outlined by ChatGPT.

• Machine learning (ML): ML is a branch of AI that enables machines to learn from data and improve their performance without explicit programming. ML can be used for tasks such as predictive maintenance, quality assurance, process optimization and generative design.
• Deep learning (DL): DL is a subset of ML that uses artificial neural networks to model complex patterns and relationships in data. DL can be used for tasks such as image recognition, natural language processing, speech recognition and computer vision.
• Reinforcement learning (RL): RL is a type of ML that trains machines to learn from their own actions and feedback. RL can be used for tasks such as robotics, self-driving cars and game playing.

According to Next Move Strategy Consulting, the market for AI is expected to show strong growth in the coming decade. Its value of nearly $100 billion is expected to grow 20-fold by 2030, up to nearly $2 trillion. The AI market covers a vast number of industries. Everything from supply chains, marketing, product making, research, analysis and more are fields that will, in some aspect, adopt artificial intelligence within their business structures.

To summarize, the rally to new highs for the Dow, S&P and Nasdaq is supported by the Fed being done with rate hikes, inflation trending lower, capital expenditure spending being forecast to be higher this year, improving consumer sentiment, a presidential election cycle and the widening optimism and understanding of AI and what it means to future corporate revenue and earnings growth. While there might be market corrections stemming from geopolitical and financial risks that are making headlines every day, the future of AI is vast. Those companies that are the picks and shovels of this technology wave stand to flourish, as has already been seen by a few.

The AI-led rally of 2023 is also leading the market in 2024, and many of the best AI stocks have enjoyed big moves higher. Any major market pullbacks will create buying opportunities in what looks to be a massive, multi-year spending cycle on AI technology. Investors that missed out on the fortunes made from the Internet have what looks to be a fantastic opportunity to cash in on the exponential growth of AI going forward and generate fantastic income by selling covered calls and naked puts on robust AI stocks, as is weekly practice of ours at my Quick Income Trader service. Check it out.