AI dominance raises market concerns
In a recent analysis, Robert Armstrong of the Financial Times explores the significant impact of artificial intelligence (AI) on the stock market, particularly focusing on the meteoric rise of Nvidia. Once valued at $400 billion, Nvidia now boasts a staggering $3.3 trillion valuation, making it the most valuable company globally. This growth has sparked concerns about the stock market’s stability, given Nvidia’s substantial influence.
Armstrong traces the origins of the current S&P 500 rally to late October of the previous year, noting a 33 percent increase in market value, approximately $12 trillion. He categorizes the gains into four distinct groups: Nvidia, the top five tech giants (Microsoft, Alphabet, Amazon, Apple, and Meta), a cluster of 10 semiconductor firms, and the remaining 484 companies in the index. A notable observation is that nearly 20 percent of the index’s gains are attributed to Nvidia alone, with an additional 10 percent linked to the semiconductor sector.
Unsettling surge of AI in the stock market
The analysis highlights the potential risks if the market reassesses the profitability of AI, considering that 56 percent of the gains are AI-related. However, Armstrong offers reassurance by pointing out that the rest of the market, excluding these AI-centric companies, has also performed well, with a 20% increase in value.
Despite this, the market has experienced a shift since late March, with a significant divergence between the market weight and equal weight indices. The non-AI segment of the market has seen a decline, indicating that companies without an AI focus are under pressure to meet earnings expectations.
Armstrong concludes with a cautionary note on the fragility of the rally, suggesting that if perceptions around AI’s business potential change, the consequences could be severe for the market. This report underscores the intricate relationship between AI advancements and market dynamics, raising important questions about the future of the stock market in an AI-dominated era.
