Artificial Intelligence-Driven Stock Market Surge Faces Skepticism

In a year marked by a remarkable rally in the stock market, fueled by a surge in “Magnificent 7” tech stocks, a prominent investor, Bill Smead, has voiced concerns that this euphoria may be overblown and poised for a significant downturn. Smead, the president of Smead Capital Management, has referred to this surge as “stock market artificial life support,” and he believes it could soon backfire as stocks face potential headwinds.

The “Magnificent Seven” comprises seven major Big Tech companies: Amazon, Alphabet (Google), Apple, Microsoft, Tesla, Meta (formerly Facebook), and Nvidia. These firms have enjoyed a meteoric rise, pulling the entire market higher, thanks to the buzz surrounding artificial intelligence (AI). However, Smead suggests that this surge might be based on shaky ground.

Smead argues that the enthusiasm around AI is not new; companies have been working on and utilizing AI technologies for the past decade. Furthermore, he points to rising interest rates, driven by the Federal Reserve’s decisions, which have made futuristic returns on exciting technologies less attractive by discounting them to their present value. The increasing yields on riskless government bonds have diminished the relative allure of riskier assets, including stocks.

Additionally, Smead highlights the questionable reputation of some of these tech giants, particularly in terms of transparency and accountability, referencing ongoing legal challenges faced by companies such as Amazon and Alphabet.

Smead’s concerns extend to the broader market. He believes that the S&P 500 index’s positive performance in 2023 hinges largely on the success of these tech behemoths. His chart reveals that the ten largest S&P 500 stocks, primarily from the technology sector, accounted for an unprecedented 96% of the index’s results this year. This concentration of gains has safeguarded substantial capital in passive index funds and prevented a mass exodus of investors.

In simple terms, Smead warns that if this small group of tech giants were to falter, it could lead to investor disillusionment and a withdrawal of funds from the stock market. While the market has been propped up by these “Magnificent Seven,” Smead’s cautionary words suggest that the artificial intelligence-driven surge may not be as sustainable as it appears. Investors are advised to remain vigilant and consider potential risks associated with the stock market’s current trajectory.