Doh you buy the hype? The publication of chatgpta tool developed by OpenAIhas sparked a wave of enthusiasm for artificial intelligence (hey). Everyone from spy agencies to law firms tries to take advantage of the technology. And investors are considering how they can benefit from a purchase hey-exposed companies.
In the stock market, this has manifested itself in an almighty boom in tech company valuations. Openhey may be private, but there are more than a dozen designing companies hey Software, invented or built the computer chips that make them hey possible, or to operate the data centers that the technology relies on are included in the S&P 500 index of leading American stocks. The latest company to have an experience hey-induced rally is Nvidia. The California-based company’s share price is up nearly 40% since announcing stronger-than-expected earnings on May 24 and has nearly tripled year-to-date. Nvidia is now the fifth most valuable public company in the US.
But not only technology companies are affected thrives. The hey The boom coincided with a broader recovery in stock markets, which suffered last year from a combination of high inflation and rising interest rates. The S&P 500 is up 8% since chatgpt launched and is up nearly 20% since its October bottom. This raises a question. How much of the rally does that explain hey Enthusiasm?
In order to answer such a question, the usual causes for large market movements must first be ruled out: namely changing interest rate or growth expectations. After all, owning a share is ultimately a claim to the future earnings of a company. One way to determine a stock’s value today is to estimate future earnings and potential growth, and then apply a discount, or interest rate, to calculate its value. This time, a changing macroeconomic outlook fails to shed light on market moves. In November, investors expected the federal funds rate to rise to around 5-5.5% by the end of 2023. Although sentiment has fluctuated, it has settled at about the same level. Earnings expectations for the year are also on average at the level of six months ago.
The next step is simpler: it involves quantifying the size of the hey bounce Analysts assume that the S&P 500 has 14 companies with significant exposure to technology. These include well-known giants like Google and Microsoft, as well as lesser-known underlying infrastructure providers like Arista and NetApp, two data center companies. Nvidia’s price alone is responsible for a huge portion of the stock market rally. Since late November, the company’s market cap has risen from under $400 billion to $950 billion — accounting for a fifth of the rally. Add Nvidia’s surge to the growing market caps of the 13 other companies hey Commitment and a notable 73% of the broader rally explained. The boom hey Tech stocks have significantly outperformed the broader tech rally. The Nasdaq is up a fifth since November, compared with a third for the highest reading hey-exposed companies.
The hey Optimism is driving the recent rally, made even clearer by looking at stock price “multiples,” which are dividing current prices by current or future earnings. These multiples are influenced by earnings and economic factors like interest rates, but also by more nebulous things under the broad label of animal spirits. In November, the average value for money was a multiple of one S&P 500 companies, excluding the 14 most exposed companies heywas around 27. At the time of writing, it had fallen to 26. Meanwhile, the average value of companies in our hey Bucket had jumped from 43 to 77.
These multiples could be justified. Much of the excitement about Nvidia’s prospects has been fueled by orders for the company’s chips. During the company’s earnings announcement, officials indicated that data center chip revenue is expected 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 known to be overly enthusiastic about new technologies. The internet enabled a new generation of businesses (and their record profits). It unleashed a wave of productivity improvements for economies around the world. The problem is that much of this happened after a stock market bubble that caused speculators to lose their shirts. It is obvious that investors are betting on it hey have to judge if the hype is justified this time. But that’s the meaning of hey to the broader stock market, so does everyone else. ■
