A quick chat about the growth of AI
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A QUICK CHAT ABOUT THE GROWTH OF AI
When it comes to the growth of AI, the market may be jumping to conclusions in that it seems to expectit will be nothing but strong and smooth.
At least, that's a concern of Philip Palumbo, founder, CEO and chief investment office at Palumbo Wealth Management.
Palumbo notes that last week, ASML Holdings ASML.O, the first AI tech leader to report second quarter earnings, beat expectations, but the company's forward guidance was not raised.
Add in concerns over the U.S. considering tougher trade rules with a China chip crackdown, and the stock price took a sharp hit.
Then last Thursday, Taiwan Semiconductor TSM earnings beat expectations and its guidance was modestly higher. The initial reaction was positive, but the impact of Biden Administration comments about restricting chip sales to China quickly dampened enthusiasm.
This week Alphabet GOOGL.O is due to report earnings on Tuesday while Microsoft MSFT.O is expected next week.
"The big questions are whether these companies will continue to accelerate their AI development (i.e. buy increasing quantities of AI chips), or whether concerns about earning a return on their massive investment will hold them back a bit," writes Palumbo in a note.
According to Palumbo, the bar is set very high for this earnings period. And he notes that the massive AI-fueled rally that has occurred over the past year or so "is already a bit bumpy and could get a lot worse if these earnings reports disappoint even a little bit."
As he sees it, the setup here is reminiscent of the end of the tech bubble. Not because tech is a disaster, but because he says tech's high concentration within the S&P 500 could produce "a declining index, while most of the stocks in the S&P 500 are actually rising!"
Palumbo's point being, that high concentrations in indexes can often generate counterintuitive results.
(Terence Gabriel)
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