Is AI Optimism driving record breaking S&P and Dow performance?
what’s happening
The S&P and Dow have broken records within the last few days.
why’s this important
While there’s been plenty of talk about recession, interest rates, and layoffs (especially among big tech), we believe that the recent record breaking performance reflects investor confidence in AI to drive substantial increases in future earnings.
over the horizon
However, despite increases, we believe AI investment is restricted from it’s larger potential by several factors:
data is “winner take all” - companies that own the sources of unique and valuable customer data will be dominant over the long term - but, predicting these companies will become increasingly difficult.
model dependency - success for companies reliant upon commonly owned data (i.e., public text and images) is volatile as new model or multi-model systems have the potential to offer order-of-magnitude better performance, with decreasing barriers to entry.
incumbents get barriers to entry via integrations - OpenAI is being tightly integrated into corporate infrastructures. Gemini will be integrated via code into other applications. In short, as end-user corporations realize the benefits of integration, incumbents will have a privileged and protected position.
synthetic data value uncertainty - synthetic data (i.e., AI generated data) has the potential to expedite implementation, but may not be universally applicable in all markets.
Additional market limits come from a future where deflation from demand erosion requires accurate market timing and yet nailing this timing will be extremely difficult. We expect this uncertainty to also increase market volatility. Further complicating timing is our belief that market deflation is dependent on the speed of AI development - something that will soon become exponential or faster (i.e., factorial).
While these factors restrict market performance, we believe we will still see continued acceleration of key indices as investors price in future performance despite other traditionally negative economic components (e.g., credit crisis, terrorism, security issues, etc.)