AI speculators need to ‘differentiate between actual spending and investment’ and hype: Strategist – Yahoo Finance

Tematica Research CIO Chris Versace and J.P. Morgan Asset Management Global Market Strategist Meera Pandit discuss how the proliferation of AI speculation has impacted markets at large.

BRAD SMITH: Just this morning, Alphabet hit $1 and 1/2 trillion in market cap for the first time in over a year. The tech giant getting a boost from the AI hype. And shares of Alphabet are up 35% this year after a dismal 2022, right alongside Microsoft, Meta, and Amazon, which are all enjoying double-digit gains for the year. So is this rally all AI hype here? I mean, have we seen so many companies just mention AI and the market say, all right, yeah, automatically there's a multiplier effect--

CHRIS VERSACE: So I'm going--

BRAD SMITH: --that you have to benefit from?

CHRIS VERSACE: So I'm going to use one of my favorite words called hopium. There is, I think, a lot of that in there because when you look at the end markets, like-- like for Microsoft, you know, data center, OK, moving along, not necessarily shooting the lights out, PCs continue to be weak, and you look at some of the other end markets also for NVIDIA, for example, what has been the common thread here? It's all been, what you just said, the mention of AI.

And what bothers me a little bit about it is how companies like PepsiCo, Wendy's, and others are starting to talk about how they will be using AI and how that's going to really change their business. And then all of a sudden, I flash back to 1999, 2000 in the dot-com era when all sorts of companies were like, well, we're no longer X company. We're x.com company. And it's almost like I got to be in the game. I got to say something.

BRAD SMITH: Which was actually different for Apple because they didn't bring it up voluntarily. It got brought up in a question for them.

CHRIS VERSACE: Yes. That's 100% correct.

JULIE HYMAN: Although for Apple, it makes more sense than--

BRAD SMITH: It does. It makes way more sense than--

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JULIE HYMAN: --Coke or Pepsi--

BRAD SMITH: --Wendy's.

JULIE HYMAN: --for example, where it's, like, a random bolt on.

CHRIS VERSACE: Well, but I mean, if you think about your iPhone, you're a carrier-- you are already carrying AI around with you day in, day out. So I'm concerned a little bit that this is overdone, right? You know, typically, when we have some new-new thing on the technology front, expectations do get big and company shares can get out over their skis. So the question to me is, what's the pop in that potential bubble? That's what I'm watching for.

JULIE HYMAN: I want to ask you about a specific one of those names that you mentioned because I know, Meera, you talk sort of more broadly. But I want to ask about Nvidia because this is a stock that has doubled--

CHRIS VERSACE: Yes.

JULIE HYMAN: --this year. It hasn't even reported its earnings yet. That's set for, what--

CHRIS VERSACE: Next week.

JULIE HYMAN: --a week from today.

CHRIS VERSACE: Next week. Next week.

JULIE HYMAN: So is this-- I mean, AI is sort of really knit into the fabric of what Nvidia chips do and what they want them to do. Does it make more sense for a company like this to be up that much or is it also too much?

CHRIS VERSACE: I would say that it's-- going into their earnings, it's probably priced to perfection, which means that they need not only to deliver, they need to beat and raise in order for the stock to-- to move further higher.

BRAD SMITH: AI as a theme, if investors were to even try and position their portfolio or have some type of exposure to AI right now-- from what we've heard even in the mentions over the earnings season, I think Mark Zuckerberg actually did the best of laying this out that it's applications that live on top of the language models that live on top of chips-- is there a strong thematic play that's emerging right now as a subset of AI perhaps?

MEERA PANDIT: I think we need to not put the cart before the horse here because I see a couple of different headwinds from an AI perspective if we bring in the macro story because one, if we think about what AI is going to require, it's going to require businesses to spend more precisely at a time where profits are weakening, companies are trying to batten down the hatches a bit and preserve the profitability. So that's a little bit of a headwind there in terms of how much additional spend can go towards this in the near term.

The other thing I'd say is I think with a lot of these technologies, they actually require more workers up front even if eventually they will save on the labor force. So if we think about the worker's position, the shortage of workers we have, the very specific training that might be required, I think there are some headwinds when we think about the supply of workers and companies' ability to put capital in the near term.

JULIE HYMAN: And sorry to interrupt, Meera, but as you're talking, it occurs to me, do companies also risk putting-- over-resourcing AI at the expense because of the hype, because of the push by investors at the expense of core businesses?

MEERA PANDIT: That's the risk.

JULIE HYMAN: Yeah.

MEERA PANDIT: You don't want businesses to be playing in too many sandboxes at the same time. So I do think that this is the time where businesses need to really focus. And businesses have been good about focusing on wage pressures, cost pressures, higher dollar over the last year or so and making some tough decisions. I don't think company managers should lose that discipline in the face of the newest shiny object.

Now, I think long term, to your point, this is a huge theme that will play out over many years. But we might need to be a little bit patient. Think about, again, some of the ancillary technology required, the inputs required over a longer period of time that can fuel this theme. But I think that the huge run-up in markets solely around AI enthusiasm might be a little bit beyond its skis.

BRAD SMITH: Chris, I saw you leaning in, about to jump on the table.

CHRIS VERSACE: Yeah. Yeah, I was just going to say that we have to kind of differentiate between actual spending and investment on this compared to companies talking about it because in this environment, if you trace it back over the last several weeks, Microsoft shares took off, right, and Google-- kind of Google shares lagged behind really until very recently, especially coming out of their I/O event, where they really talked about how they're incorporating AI not only into Bard, but in other areas, saying that, hey, we are in this game. And again, if you look at that as the model, companies that don't really talk about it, there's going to be this perception that, oh, maybe they're falling behind, and they won't want that.

BRAD SMITH: Are we underestimating what the regulatory framework for AI may look like at this point?

CHRIS VERSACE: My suspicion is yes.

BRAD SMITH: Yeah.

JULIE HYMAN: Yeah, I mean, at the same time, if we have companies that risk not talking about it, like is that-- and falling behind, is that an opportunity for investors? In other words, just because a company isn't talking about it doesn't mean it's not doing it. It doesn't mean-- do you know what I mean?

CHRIS VERSACE: Yeah. Yeah. Yeah. Well, take your point on Apple-- or Brad's point on Apple, right? They are doing it. They are investing in it. But they're not necessarily talking it up. I think the one thing I will say is not for investors, I think for traders.

JULIE HYMAN: Gotcha. An important distinction always to make.

BRAD SMITH: Great to have you both here with us today. We've got Chris Versace, Tematica Research chief investment officer, Chris, great to see you, as always, as well as Meera Pandit, who is the JP Morgan Asset Management global market strategist. We appreciate the time this morning.

CHRIS VERSACE: Thank you.

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AI speculators need to 'differentiate between actual spending and investment' and hype: Strategist - Yahoo Finance