DAVID SHAPIRO: The really big guys are missing the boat

Early in December last year, I read a report in which Morgan Stanley’s Michael Wilson, reflecting on the S&P 500’s 9% rise to 4,072 points in November, claimed that he’d seen enough.

He saw a possible upside of 4,150 in the index and warned investors to be defensive if they wanted to remain in equities. He suggested investing in healthcare, consumer staples and utilities. 

Wilson was not alone. Most of the major investment houses shared his view, believing that sticky inflation, pressure on the household spending and ongoing monetary tightening would push the US economy into recession in 2023, crush corporate profits and send stock markets tumbling.

Without exception the consensus view was to underweight technology shares, whose lofty valuations were considered unjustified in a high-interest rate environment. Besides that, they felt restrictive monetary policies would slow demand for advertising, e-commerce and a wide range of other tech offerings. 

Wilson was right, for a month. In December, the S&P 500 headed back to 3,840, but since then the index has climbed to 4,450, a rise of 16%. Even more striking has been the Nasdaq composite index, an index heavily influenced by the performance of technology shares, which gained 32%.

How did so many influential voices in the financial industry get things so terribly wrong? Simple. Few imagined that the November release of ChatGPT, a friendly chatbot that enables human-like conversations with a computer, would attract millions of users and fuel a manic rush by businesses to incorporate this game-changing technology — generative artificial intelligence (AI) — into their operations. It wasn’t a question of what to do, but rather should they build or buy?

The belief in markets is that whoever leads in AI will lord it over the competition through significantly improved capacity and efficiency. AI search engines retrieve information quickly and accurately, saving time spent manually sifting through large amounts of data.

Users’ search history and behaviour can be analysed speedily, helping customers find more easily what they’re looking for. Repetitive tasks, such as data entry or file organisation, can be automated. The opportunities are endless and as technology advances more innovative ways will be discovered to improve productivity in key areas such as e-commerce, healthcare, finance, education and research.   

Worn thin by months of talk of stubbornly high inflation and the extent to which this would slow the US economy, investors were quick to embrace the excitement around AI and dash into companies positioned to benefit from the ground-breaking technology.

Nvidia, whose trailblazing semiconductors are regarded as market leaders in the design of AI systems, was pushed up 190% in the first six months of the year. Microsoft, which included ChatGPT in its Bing search engine, rose 42%. Not to be outdone, rival Alphabet added its AI chatbot, Bard, to Google and gained 35%. Amazon was up 55% on expected increases in traffic that will arise in its web services division.

Against the negative backdrop of rising prices and restrictive central bank policies, the momentum behind AI-related stocks caught many large asset managers by surprise. Even so, few of these investment houses have changed course, choosing to remain guarded about the fitness of the global economy and the outlook for equity markets.

Their bet is that AI stocks represent only a small part of the broader market and will fail to live up to the expectations embodied in their current valuations. A minority believe AI is a game changer that is too risky to ignore, and its appeal will continue to drive business spending upwards.

I’m happily ensconced in that camp. 

• Shapiro is chief global equity strategist at Sasfin Wealth.