Day: June 29, 2024

Investing.com — Tech giants and other firms are set to spend roughly $1 trillion in the coming years on developing their artificial intelligence capabilities, including investments in data centers, chips and other AI-related infrastructure, according to analysts at Goldman Sachs.

But they argued that these expenditures have so far failed to yield much “beyond reports of efficiency gains” among AI developers, while Nvidia (NASDAQ:NVDA) — the Wall Street darling and focal point of the craze around the nascent technology — has seen its shares “sharply correct.”

To explore whether heavy corporate spending on AI will deliver meaningful “benefits and returns,” the investment bank spoke with a series of experts, including Daron Acemoglu, a professor at the Massachusetts Institute of Technology who specializes in economics.

AI spending’s potential impact on productivity

Acemoglu took a largely skeptical stance on the outcome of the capital rush, estimating that only a quarter of AI-related actions will be “cost-effective to automate” within 10 years — implying that AI will effect less than 5% of all tasks.

“Over this [10-year] horizon, AI technology will […] primarily increase the efficiency of existing production processes by automating certain tasks or by making workers who perform these tasks more productive,” Acemoglu told Goldman Sachs. “So, estimating the gains in productivity and growth from AI technology on a shorter horizon depends wholly on the number of production processes that the technology will impact and the degree to which this technology increases productivity or reduces costs over this timeframe.”

However, he predicted that there will not be a “massive” number of tasks that will be impacted by AI in the near term, adding that most actions humans currently perform — such as manufacturing or mining — are “multifaceted and require real-world interaction.” Instead, Acemoglu said he expects AI will have the biggest influence in the coming years on “pure mental tasks,” adding that while the amount of these actions will be “non-trivial” it will not be “huge.”

Ultimately, Acemoglu forecast that AI will increase U.S. productivity by only 0.5% and bolster overall economic growth by 0.9% over the next decade.

AI’s “limitations”

Acemoglu added he was “less convinced” that Big Tech’s plans to greatly increase the amount of data and processing power they plug into AI models will lead to faster improvements of these systems.

“Including twice as much data from [social media platform] Reddit into the next version of [OpenAI’s chatbot] [ChatGPT] may improve its ability to predict the next word when engaging in an informal conversation, but it won’t necessarily improve a customer service representative’s ability to help a customer troubleshoot problems with their video service,” he said.

The quality of data is also crucial, Acemoglu noted, flagging that it remains unclear what will be the major sources of high-end information or whether it can be obtained “easily and cheaply.”

Finally, he warned that the current architecture of AI technology itself “may have limitations.”

“Human cognition involves many types of cognitive processes, sensory inputs, and reasoning capabilities. Large language models (LLMs) today have proven more impressive than many people would have predicted, but a big leap of faith is still required to believe that the architecture of predicting the next word in a sentence will achieve capabilities as smart as HAL 9000 in ‘2001: A Space Odyssey,'” Acemoglu said, referring to the fictional artificial intelligence character in a popular 1960s science fiction film.

An AI “bubble” or a “promising” spending cycle? 

The Goldman Sachs analysts assumed a mixed approach to the crush of spending on AI, with some saying the technology has yet to show it can perform the complex problems needed to justify the elevated expenditures.

These researchers also said they do not anticipate that AI costs will ever decline to such an extent that it will be affordable for companies to automate a large portion of tasks. Fundamentally, they said the AI story that has driven an uptick in the benchmark S&P 500 so far this year is “unlikely to hold up.”

Despite these concerns, other Goldman Sachs analysts took a more optimistic stance, forecasting that AI could lead to the automation of a quarter of all work actions. The current uptick in capital expenditures, they argued, seems “more promising” than prior spending cycles because “incumbents with low costs of capital and massive distribution networks and customer bases are leading it.” They also predicted that U.S. productivity would improve by 9% and economic activity would grow by 6.1% cumulatively in the next decade thanks to AI advancements.

Overall, however, the Goldman Sachs analysts concluded that there is “still room for the AI theme to run, either because AI starts to deliver on its promise, or because bubbles take a long time to burst.”

US equities may be poised for a breather after a strong last leg of its rally, market guide Stock Trader’s Almanac said in a note on Friday.

Historically, midyear Russell Index and institutional fund portfolio rebalancing, coupled with the Q2 earnings season and the start of the second half of the year, have made July the best month of the third quarter.

Within this, the Almanac expects the ongoing bull run to continue its upward trend and reach more new highs by the end of the year. However, the strong gains so far in 2024 “may have the market out a little too far over its skis,” it added.

NASDAQ Composite 12-day midyear rally, which spans the last three trading days of June through the first nine trading days of July, has previously likely been driven by the rebalancing activities and Q2 earnings reports occurring in late June and early July, Almanac noted.

“After this run, which usually peaks out near midmonth, a mild pullback in the 5-8% range would not be surprising,” the note states. This mid-year rally is referred to as “Christmas in July,” Stock Trader’s Almanac noted.

The market guide pointed out that a bullish election year combined with a significant technological macro trend from generative AI and related industries have driven the market higher than expected. They suggest that this AI could be the “culturally-enabling, paradigm-shifting technology” that propels the next phase of their 2010 Super Boom Forecast.

Their updated Election Year Seasonal Charts for the S&P 500 and NASDAQ indicate that the 2024 market is following the trend but is significantly above the levels of previous election years and other seasonal scenarios. Currently, the S&P 500 is even 5 percentage points above the most bullish Top Q1 Election Years setup.

“The market has already reached and surpassed the 8-15% level of our 2024 Annual Forecast Base Case projection,” Almanac continued. “While this brings our Best Case forecast of 15- 25% gains for 2024 into play, the market looks like it’s due for some mean reversion.”

Unless something dramatic occurs during this unprecedented Presidential Election debate or any major surprises arise in the next two weeks, Stock Trader Almanc’s analysts expect the midyear rally to drive the market higher into mid-July.

Beyond that, the market may become vulnerable to election campaigns and political missteps, Fed commentary, disappointing economic data, and the usual Summer Market Volume Doldrums.

Wells Fargo offered guidance for investors navigating the coming 18 months in a note this week, highlighting five key portfolio ideas.

Looking ahead to 2025, Wells Fargo anticipates opportunities to “broaden equity exposure” during market downturns and potentially “increase portfolio yields” if interest rates remain elevated.

They also recommend considering “non-traditional asset classes” like commodities and hedge funds for enhanced returns and risk management.

Here are their top five portfolio ideas:

Buy the Dip in Large-Cap Equities: Wells Fargo expects potential market pullbacks due to the upcoming elections and inflation concerns. They advise using these dips to add to your U.S. Large Cap Equity holdings, their preferred equity class.

Lock in Yields with Longer-Duration Bonds: With interest rates at multi-year highs, Wells Fargo sees an opportunity to generate income with “U.S. Short Term Taxable Fixed Income.” They suggest considering longer-term maturities to lock in attractive rates when yields reach the higher end of the range (4.25% – 5.00%).

Invest in Growth Sectors: Fueled by infrastructure spending and AI advancements, Wells Fargo recommends overweighting allocations in Energy, Industrials, and Materials sectors. They also highlight data center REITs and energy companies poised to benefit from the data storage and power needs of AI.

Hedge Uncertainty with Alternatives: Alternative investments like Relative Value and Event-driven strategies can add diversification and potentially offset market volatility. Additionally, Wells Fargo sees private capital emerging as a compelling option due to trends like AI and lower valuations.

Hedge Risks with Geopolitical Plays: Given the heightened economic and geopolitical uncertainty, Wells Fargo suggests using the US dollar, US equities, and investment-grade fixed income as hedges. They also favor commodities and precious metals for their potential inflation hedge and to mitigate supply chain disruptions caused by global conflicts.

Benchmark analysts are bullish on one oilfield services company, telling investors in a note that they see the stock as undervalued.

The company in question is Schlumberger (NYSE:SLB). Benchmark thinks the stock is significantly undervalued and said it is time to “establish a new long position, increase an existing weighting or cover a short.”

Benchmark argues that “the stock is mispriced relative to fundamental reality.” They view the current price as a major buying opportunity, especially considering it’s close to levels seen during major crises like the 2008 financial crisis and the COVID-19 pandemic.

The low valuation is even more striking when compared to Schlumberger’s current financial health. Benchmark highlights the company’s “EV/EBITDA multiple of ~7x, the lowest valuation in a non-crisis year since 2011-13.”

Historically, such low valuations have been followed by significant rebounds, with Benchmark citing an average gain of “20% within 3-weeks.”

Furthermore, Benchmark believes Schlumberger’s strong fundamentals justify a higher stock price. Their estimates include the recent acquisition of ChampionX (CHX), which strengthens Schlumberger’s position in the production sector.

Despite solid financials, Schlumberger’s valuation remains lower than historical averages, presenting a significant “multiple reversion” opportunity.

Beyond financials, Benchmark highlights several positive developments for Schlumberger.

The company benefits from strong revenue visibility due to long-term international and offshore projects. The recent acquisition of CHX bolsters Schlumberger’s presence in artificial lift and production chemicals.

Furthermore, Benchmark says Schlumberger’s AI-powered solutions are experiencing rapid growth and are expected to be a significant profit driver. The company’s investment in carbon capture technology positions it well for the energy transition.

With a combination of a low valuation, strong financials, and positive growth catalysts, Benchmark believes Schlumberger presents a compelling opportunity for investors.