Source: Barron's
Author: Ben Levinson

The gap between the promises that artificial intelligence wants to fulfill and the promises it can deliver is still very large, and this may also be a major problem facing investors.

Artificial intelligence has made many promises. In the future, humans will no longer have to fill out forms, order takeout, or drive cars. Humans will either lean on a reclining chair and let the robot do all the work, like the humans in “The Terminator,” or face the end of the robot in “Terminator” trying to end humans.

Artificial intelligence stocks have been this year$S&P 500 Index (.SPX.US)$The main driving force behind the rise, whether it is the production of artificial intelligence chips$NVIDIA (NVDA.US)$It also benefits from the collaboration with ChatGPT and the use of artificial intelligence technology in its products$Microsoft (MSFT.US)$.$Apple (AAPL.US)$The stock rebounded after experiencing a “black start”, thanks in part to investors hoping that this technology will create demand for iPhones that support artificial intelligence.

Investors only needed to know one thing before: as long as AI stocks were rising, the stock market would rise.

However, there are signs that AI stocks are no longer as risk-reward as they used to be. Every time an image appears$C3.ai (AI.US)$ After this kind of company whose stock price soared 19% after announcing that the loss was lower than expected, something like$UiPath (PATH.US)$ This company's stock price plummeted 34% after announcing revenue guidance that fell short of market expectations and unexpectedly announced the CEO's resignation.

Also, every time something like$HP Inc (HPQ.US)$Something like this will happen when the stock price rises 17% after surpassing expectations and promoting its “portfolio of innovative solutions designed for the artificial intelligence and hybrid era”$Dell Technologies (DELL.US)$This kind of company, whose stock price plummeted 22% after profit was only 1 cent higher than expected, is clearly not good enough for Dell, which has risen 80% in the past three months.

Throughout the earnings season, betting on individual AI stocks has always been a high-return, high-risk investment. Dennis Debusschere (Dennis Debusschere) of 22V Research pointed out that since the launch of ChatGPT4 in 2022, 86% of “artificial intelligence application” companies have exceeded expectations in profits, which is higher than 78% of other companies in the stock market.

When profits exceeded expectations, the increase in AI stocks was also higher than that of other “ordinary” stocks whose profits also exceeded expectations. In the first quarter, AI stocks rose by an average of 0.3% after announcing profits that exceeded expectations. In contrast, other stocks fell by an average of 0.3% after announcing profits that exceeded expectations.

However, when AI stocks fell short of expectations, they fell by an average of 5.3%, while other less profitable stocks fell by an average of 2.5%. “This is because AI stocks have higher beta coefficients when profits are higher or lower than expected,” Debschel explained.

However, as far as the stock market as a whole is concerned, there is only one AI stock that really matters; it is Nvidia. According to Evercore ISI data, when Nvidia released its earnings report on May 22, the correlation between Nvidia's stock price and the S&P 500 index was 0.95. Over the past year, the trend of Nvidia and the S&P 500 index was almost exactly the same. Although correlation and causation are not the same thing, in the Nvidia and S&P 500 cases, this correlation is almost equivalent to a causal relationship.

However, a few things have changed in recent trading days. On the first trading day after the earnings report was announced, Nvidia rose 9.3%, an astonishing increase for a company with a market capitalization of over $2 trillion. 22V Research's Debschel pointed out that Nvidia's earnings report also gave a boost to other stocks: such as$ASML Holding (ASML.US)$,$Broadcom (AVGO.US)$,$Marvell Technology (MRVL.US)$ with$Taiwan Semiconductor (TSM.US)$Other chip stocks,$Eaton (ETN.US)$,$TransDigm (TDG.US)$und$Johnson Controls (JCI.US)$such as industrial stocks, and$Constellation Energy (CEG.US)$ with$Vistra Energy (VST.US)$Other utilities stocks.

However, on the first trading day after Nvidia announced earnings, the S&P 500 closed down. Debschel said, “The AI trade market (AI trade) has very strong momentum, but the artificial intelligence market, which is separated from Nvidia's earnings report, has failed to drive the overall market to rise.”

This is a worrying phenomenon. Evercore ISI strategist Julian Emanuel (Julian Emanuel) pointed out that Nvidia rose 20% in the three days after the release of the earnings report, but the S&P 500 index fell slightly (less than 1 point).

Emmanuel was very confused by the fact that the stock ranked third by market capitalization in the S&P 500 index had risen so much, and so he tried to find another example to show that the top five stocks in the S&P 500 index rose at least this much and the index ended up falling, but he did not find such an example.

Emmanuel said, “Nvidia is no longer 'the stock that can represent the stock market'. This may bring an end to the low volatility in the stock market over the past two weeks.”

The calm in the stock market appears to be being shattered. Last Friday (May 31), the VIX Panic Index rose from 11.93 last Monday to 14.51, and there was some noise in the stock market, which had been very dull until now. As the stock market loses upward momentum, it may be time to consider withdrawing from the artificial intelligence market and switching to the Dow Jones Industrial Average.

Nothing “goes against” the AI-driven market more than the Dow. Nvidia is not a component of the Dow. Furthermore, since the Dow is a price-weighted index, the largest stock in the Dow is$UnitedHealth (UNH.US)$Goldman Sachs (GS), Microsoft ranked third, while Apple was in the middle, sandwiched between$JPMorgan (JPM.US)$und$Boeing (BA.US)$between.

No wonder$Dow Jones Industrial Average (.DJI.US)$It only rose 1.2% this year, far lower than the 9.3% increase in the S&P 500 index and$Nasdaq Composite Index (.IXIC.US)$10.3% Recently, due to the poor financial performance of UnitedHealth and$Salesforce (CRM.US)$ The impact of the expected earnings report was less than what was expected, and the Dow was hit hard. (Honestly, Salesforce shouldn't replace it at all$Exxon Mobil (XOM.US)$(Became a Dow constituent stock.)

Larry McDonald (Larry McDonald), founder of Bear Traps Report, pointed out that the Dow has fallen 4.7% since breaking through 40,000 points on May 17, and was at the highest oversold level since September 2022 at the close of trading last Thursday.

The Dow may not be a robot choice, but if the AI market has reached its end, investors who stick to the AI market may perform worse than the Dow.

Editor/jayden