The big tech stocks have driven the rally in US equities this year, and much of the recent stock-market euphoria has centred on advances in artificial intelligence (AI). We now have a new acronym: MANAMAT. Remember we had the FAANGS stocks? Now we’ve got MANAMAT – Meta, Alphabet, Nvidia, Amazon, Microsoft, Apple and Tesla – which make up an unbelievable 29% of the market cap of the S&P 500. The S&P 500 is up 14% for the year to date, but if you exclude the tech stocks, it is flat.
So why is everyone so excited about AI? Is it just a fad, or a global game changer?
With the release of ChatGPT at the end of last year we saw a huge shift from the traditional AI we've been using for years to something that can generate new content – GPT stands for generative pre-trained transformer, and the key word is “generative”. So although there’s a lot of hype, there’s no doubt of the massive impact of this breakthrough.
I asked ChatGPT what it sees as the key risks presented by this new technology. Firstly, it listed job displacement. Originally it was thought that AI would replace the mundane, repetitive tasks, but actually there are large parts of industries on the creative side, in content production, that will be displaced. Think new songs, pieces of art, advertising campaigns, etc.
Another risk ChatGPT mentioned was bias and discrimination. If AI can perpetuate biases that are present in the data, where does that lead? Politically, for example, what will happen in next year’s US election?
The third risk is around security and privacy. AI can effectively impersonate people in speech, language and even visually. Imagine the potential impact this could have on our privacy and data security?
Looking at the upside, AI provides almost every industry we know of with enormous opportunities to drive through efficiencies and enhance productivity. I mentioned creative industries like art, music and design where generative AI can now create new content. It will be able to do that at a far lower cost. We’ll continue to see disruption in customer services where annoying chatbots develop human-like intelligence to understand the questions and solutions we are looking to answer. Healthcare will be transformed in areas like diagnostics. Imagine the possibilities around how we can better manage both energy consumption and production?
Like the internet and the smartphone transformed our lives and industries, generative AI will do the same. It will have many positive impacts on businesses, but the impact it has on society will be much more complicated. While we’ve seen tremendous progress over the past 40-50 years with hundreds of millions of people no longer living in poverty, the wealth divide is getting worse. Put simply, the share of the pie going to capital compared to labour continues to grow and AI will only accelerate that. It's hard to see how that is a good thing.
Nowhere is this divide more apparent than in the financial markets. We have two separate markets in the US, and then there’s the rest of the world. In the US those seven MANAMAT companies are 29% of the market, but their PEs are, depending on the company, in the high 30s or 40s. It’s one thing having that sort of a PE in a company with a market cap closer to $100 billion – you can grow that market much quicker than you can grow a three-trillion-dollar company, so you’re paying a lot for owning those companies.
While there are differences with the dot.com bubble in the late 90s – these are much bigger, more advanced, profit-making companies – there are many similarities in terms of the disparity between tech and non-tech companies or between growth and value stocks.
Overall, the S&P 500 is trading off a cyclical-adjusted PE (a long-term PE) of close to 30. And whenever you have reached that type of level, over the last few decades, it has meant your future returns, unfortunately, on a real basis, are closer to 2%. We are also now 500 basis points into a credit tightening cycle in the US. So we’re at a point where there is recession risk and the market is trading at very high multiples. There are going to be winners and losers, but overall the US market is very expensive.
