Manyou buy it Hype?posting of chatgptTools designed by Openartificial intelligenceset off a boom in artificial intelligence (AI). Everyone from spy agencies to law firms are trying to take advantage of the technology.Investors are figuring out how to take advantage of this by buying AI-Exposed company.
In the stock market, this manifests itself as a huge boom in tech company valuations.OpenAI It may be private, but there are a dozen design firms AI software, invented or manufactured computing chips that enable AI possible, or the data center on which the operating technology relies is contained in Second&p US Major Stocks 500 Index.Latest Company Experience AISparking the rally was Nvidia. Shares of the California company have risen nearly 40% since reporting unexpectedly strong earnings on May 24 and have nearly tripled so far this year. Nvidia is now the fifth most valuable public corporate entity in the United States.
It’s not just tech companies that are thriving, however.this AI The boom coincided with a broad-based recovery in the stock market, which last year was hit by a double whammy of high inflation and rising interest rates.this Second&p 500 up 8% since Chatgpt Since its launch, it has risen nearly 20% from its October lows. This raises a question.Exactly how much of the rally can be explained by AI enthusiasm?
To answer such a question, it is first necessary to rule out the usual culprits of major market volatility: namely changes in interest rates or growth expectations. After all, owning shares is ultimately a claim on the company’s future earnings. One way to calculate the value of stocks today is to estimate future earnings and potential growth before applying discounts or interest rates to calculate their value. This time around, the changing macro outlook fails to shed light on market moves. In November, investors saw the federal funds rate rising to around 5-5.5% by the end of 2023. Roughly stable at the same level despite mood swings. The average earnings estimate for the year is also unchanged from six months ago.
The next step is more straightforward: it involves quantifying AI bounce. Analysts believe that Second&p Fourteen of the Fortune 500 companies have significant influence on the technology. These include well-known giants such as Google and Microsoft, as well as lesser-known underlying infrastructure providers such as Arista and NetApp, two data center companies. On its own, Nvidia’s price has played a big role in the stock market recovery. Since the end of November, the company’s market value has soared from less than $400 billion to $950 billion — accounting for a fifth of the increase.Add Nvidia’s surge to 13 other companies’ growing caps AI Exposure and a notable 73% of the broader rally are explained.prosperity AI Technology stocks easily outpaced the broader tech rally.this Nasdaq It has risen by a fifth since November, with the biggest increase being a third AI-Exposed company.
That AI Optimism, the driver of the recent rally, becomes clearer when looking at stock price “multiples,” which are current prices divided by current or future earnings. These multiples are influenced by economic factors such as income and interest rates, but also by more nebulous factors under the broad label of “animal spirits.” The multiple of the average price in November to the current price-earnings ratio Second&p 500 companies, excluding the 14 most affected companies AI, about 27. At our press time, the P/E ratio has fallen to 26.At the same time, our company’s average price-to-earnings ratio AI Barrels jumped from 43 to 77.
These multiples may be justified. Much of the excitement about Nvidia’s prospects has been fueled by orders for the company’s chips. On the company’s earnings call, representatives said revenue from data center chips was on track to double, from an already record-breaking $4 billion in the first quarter to $8 billion in the second quarter.
On the other hand, investors are notoriously over-excited about new technologies. The internet made possible a new generation of companies (and their huge profits). It set off a wave of increased productivity in the global economy. The problem is that most of this happened after the stock market bubble, leaving speculators with nothing to lose.Clearly, investors are betting on AI Whether the hype is justified must be assessed.but that’s the point AI For the broader stock market, so must others. ■