Ten days after the Super Bowl, Wall Street held its own version — at least that's how some traders on social media described it.
Nvidia, which made its name selling most of the chips behind the artificial intelligence boom, was scheduled to report a bumpy quarterly report that could move the market.
The company beat expectations, posting a 265% year-over-year revenue increase.
The next day, the S&P 500 rose 2.5%. Meanwhile, the tech-heavy Nasdaq rose nearly 3%.
Steve Sosnick, chief strategist at trading firm Interactive Brokers, told ABC News: “This is really a result of Nvidia's strong results. It's a testament to the power of AI.”
“But I was wondering: What if we flip that around and Nvidia doesn't deliver?” Sosnick added. “If you rely on a narrow group of stocks and that group is actually driving the market higher, the level of risk increases.”
The stock market has been rising since the beginning of last year, largely due to a group of big technology companies driven by enthusiasm for AI. Bulls said this trend exemplifies the typical concentration at the beginning of a technological revolution, as a small number of companies with huge resources develop and popularize AI.
But critics warn that leveraging AI for profit remains a distant vision and risks a market downturn if the technology doesn't reach the watershed promised by its backers. Some analysts told ABC News that many people with 401(k)s or college funds that rely on the S&P 500 could be burned.
“AI has gone into hyperdrive,” Sosnick said. “People buy into the S&P 500 every day thinking it's a diverse group of stocks. The current concentration underestimates its risks.”
Major stock indexes have rallied in recent months as investors remain optimistic about the benefits of emerging technologies.
But these gains were mainly concentrated in a small number of tech giants known as the “Magnificent Seven”: Alphabet, Amazon, Apple, Meta, Microsoft, Tesla, and Nvidia.
The S&P 500 is weighted based on company value, so larger companies have a higher representation in the index. The Magnificent 7 accounted for nearly two-thirds of the index's 24% rise in 2023, according to a Reuters analysis.
“The AI revolution is driving the tech bull market and the broader market,” Dan Ives, managing director of equity research at investment firm Wedbush, told ABC News.
Shares in Microsoft, the world's most valuable company, have soared nearly 75% since the beginning of last year.
That stretch began in January 2023 with the announcement that Microsoft would invest $10 billion in OpenAI, the artificial intelligence company that developed ChatGPT. A few months later, Microsoft's Bing became ChatGPT's default search engine.
Apple, the world's second-largest company, is working on plans to incorporate generative AI into all of its devices, Bloomberg reported in October. Earlier this month, Nvidia became the third largest company on the planet.
Analysts who are bullish on the market acknowledge the concentration of top companies, but expect the benefits from AI to grow even further as technology penetrates the economy and small businesses gain notoriety.
“Chatbots are just the tip of the iceberg,” said Mike Lucas, CEO of Truemark Investments, which specializes in exchange-traded funds (ETFs). “The AI revolution is real and here to stay.”
TrueMark Investments offers an ETF that allows investors to buy stocks pegged to a basket of about 20 AI-related companies, ranging from Nvidia to lesser-known companies. This ETF has soared 52% over the past year.
“For me, the early stages always reflect buying something that people can see, touch and understand,” Lucas added. “Right now, it's the big companies that are blowing the doors off of revenue with the news. It's going to spread even further.”
Ives said the flurry of investment in AI will spur companies to spend more on the technology, which will push it into a broader market and further boost profits.
“We're going to see a ripple effect from this massive wave of spending,” Ives said.
But skeptics abound. They point out that they believe there is a lack of evidence that AI will help businesses beyond a few tech giants. Without broader adoption, the market explosion could fizzle out, they say.
A study released last month by a group of researchers from leading universities and federal agencies found that less than 6% of companies use AI-related technologies, but the majority of very large companies report at least some use of AI. .
Christina McElheran, a business professor at the University of Toronto and a co-author of the study, said there is no single agreed-upon definition for the technology and some companies continue to strive to accurately define the private sector's use of AI. Observers said they faced difficulties in assessing the situation. secret.
But there's a risk that market excitement about AI is outpacing adoption, which so far seems modest.
“My concern is that the rate and level of excitement and investment is outpacing the rate and level of actual absorption and adoption within companies,” McElheran said. “That disconnect is a pain.”
Interactive Brokers' Sosnick said the AI boom will require adoption by companies large and small that don't have a direct connection to the technology.
“If you're just a regular business, it's not yet clear how AI will benefit you,” Sosnick said. “Is this helping Pepsi do its job more efficiently? It's hard to say.”
Sosnick added that NVIDIA is “essentially selling picks and shovels to gold miners.”
“Ultimately, the real success or failure of AI will be whether it trickles down to other companies' bottom lines,” he said. “Right now, it's not clear whether that's the case.”
