The entirety of the American stock market is dependent on a $4.5 trillion wager
David Chavarria Oped
The entirety of the American stock market is dependent on a $4.5 trillion wager.
The bet is that the AI gold rush will not end, but as macroeconomic issues, such as data delays on account of the government shutdown, rattle investors, the Magnificent Seven (the top seven U.S. tech companies) continue to run on momentum and hype.
This heavy dependence on a few companies to carry market trends has created conditions for an economic bubble to form.
To start, the economic term “bubble” refers to the rapid growth of a business sector, such as A.I., to the point where it’s as if air were being blown into an already inflated bubble, disregarding any possibility of it popping because it is simply too big to pop. If the bubble happens to pop, which refers to a market crash, all involved would suffer substantial losses, even those who aren’t risking any. But why do major banks and top analysts think this could happen?
Specifically, ChatGPT is a significant contributing factor. Although the integration of artificial intelligence in our lives was inevitable, the levels that the demand for it has reached in recent years are not healthy.
OpenAI released ChatGPT in November 2022 and gained 1 million users in a week and 100 million users in 2 months. Since OpenAI hasn’t IPO’ed (when a company goes public on the stock market for everyone to buy), it has only been able to gain capital (money) through large private investors such as Google, Microsoft, and Nvidia.
Consequently, GPUs are why the computers in the server rooms of OpenAI can write essays and solve math problems in seconds, and they’re a hot commodity. Right now, Nvidia is the dominant GPU manufacturer, and in 2022, when ChatGPT gained its first million users, Nvidia was the first to generate money. The constant growth of GPT users means that more GPUs are needed, leading to record-breaking profits.
Nvidia, having reached trillions of dollars in valuation, has made it one of the most attractive companies to invest in, resulting in its appearance in the retirement funds of millions of Americans, the market funds that banks manage, and the widespread use of its product in companies of all sizes to seem more attractive themselves and have their own stock valuations increase.
Thus, a vast number of people own Nvidia, whether they know it or not, and they interact with it every day. The danger lies in that the market’s enthusiasm has shifted from solid data to speculation (emotionally clouded judgment). The widespread speculation is what has turned healthy growth into an already inflated bubble at risk of popping, which could take everything down with it, since AI is everywhere.
As a radical optimist, I hope the recent negative trends across the tech sector are merely the symptoms of a small market correction (natural drop to calm the volatility), but as an investor, I plan on keeping a wary eye on earnings reports, specifically for Nvidia.
The AI gold rush is real, but at its current pace, the momentum it carries does not seem sustainable without more corrections. The moment these valuations are questioned, the emotional judgment that fueled this bubble will reverse, triggering a broad market correction that could significantly impact any managed account heavily exposed to the technology sector’s current high valuations.
Disclosure: I am currently maintaining a Hold position on AI-related equities and am not making a recommendation to buy or sell. The information provided is NOT financial advice. I am not a financial adviser, accountant, or the like. This information is purely an expression of my thoughts and my opinions.