Record Stock Market Riding on Questionable AI Assumptions…

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Remember all the bulls earlier this year getting excited that the rally was broadening out beyond the “Magnificent Seven” stocks, and how wider gains were a sign that the market’s rise was sustainable? Not so much.

This month, as indexes hit fresh records, just four giant technology stocks added more market value than the rest of the S&P 500 put together. A brief burst of outperformance by smaller stocks seems to have petered out again.

Nvidia, Microsoft, Apple and Alphabet between them have added over $1.4 trillion this month, more than the other 296 stocks that rose put together. Half of the gain was just one company, chip maker Nvidia.

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Behind the rises in the biggest stocks this month and this year are two trends, which have already run a long way: Artificial intelligence and higher-for-longer interest rates. Any trend can always go further, but there are challenges to both. Today I’ll look at AI, with a return to the higher-for-longer narrative to follow in a subsequent column.

AI has had an astounding run since OpenAI unveiled ChatGPT to the world in late 2022, and Nvidia has been the biggest winner as everyone races to buy its microchips.

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To see what could go wrong, note that this isn’t the usual speculative mania (though there was a mini-AI bubble last year). Nvidia’s profits are rising about as fast as its share price, so if there is a bubble, it’s a bubble in demand for chips, not a pure stock bubble. To the extent there is a mispricing, it’s more like the banks in 2007—when profits were unsustainably high—than it is to the profitless dot-coms of the 2000 bubble.

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