Artificial Intelligence Drives the Stock Market 

Strategy consultants at J.P. Morgan points out that the S&P 500SPX +0.83%'s 8% year-to-date gain has been fueled by the stock market's narrowest stock leadership since the 1990s. "Interest in generative AI and [the] Large Language Model theme appears to be stretched," the researchers write.

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Large language models power conversational bots like ChatGPT from Microsoft-backed OpenAI, which has been in use by office employees since it went public in November. I inquired last week if I should sell and leave in May. "No" appears to have been the answer, albeit wordier and more meandering, with plenty of noncommittal language like "may not" and "not necessarily" and "generally." In other words, robots have already mastered the financial consulting industry.

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This year, chatbot-themed investments have contributed $1.4 trillion to the stock market's worth. Microsoft MSFT +0.80% (ticker: MSFT), Alphabet GOOGL -0.23% (GOOGL), Amazon.com AMZN -3.98% (AMZN), Meta Platforms META +0.74% (META), Nvidia (NVDA), and Salesforce (CRM) were recently responsible for 53% of S&P 500 advances. The ten largest S&P 500 members have the highest index weighting ever.

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This would be easy to dismiss as nonsense if artificial intelligence wasn't taking center stage this earnings season. Microsoft, Alphabet, and Meta announced strong earnings. According to investment firm Wedbush, Microsoft is dominating the AI weapons race. According to Morgan Stanley, search is becoming progressively more valuable at Alphabet as Google translates user activity into language-model training for improved results. At Meta, users who formerly relied on a small group of friends and family for postings are now attracted by an endless stream of AI-recommended videos.

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Then there are the costs. At a recent conference, a top Microsoft executive stated that when his developers used an AI tool called GitHub Copilot, which converts natural language into coding suggestions, their productivity increased by 55%. Higher productivity necessitates fewer programmers and support staff. This, together with the recent downturn in advertising demand and economic worries, is driving a quick rethinking of headcount.

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Meta is cutting off over a quarter of its workers and has not ruled out further reductions. Morgan Stanley has explained what this entails for the company's financial model. It had previously expected a 10% increase in headcount in 2024. If it reduces that amount to 2%, profits would increase by around $1.20 per share or 8%. According to Morgan Stanley, recent layoffs at Meta, Alphabet, and Amazon are partially a result of earlier overhiring. However, long-term changes are likely: "Forward hiring levels should arguably be smaller and more targeted due to rapidly emerging AI productivity drivers."

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Meta stock peaked at nearly $380 in September 2021 before plummeting to around $90 in November due to rising interest rates and fears that the corporation was wasting money on speculative metaverse goals. Meta's stock recently traded at $238, indicating that it is now seen as a low-cost AI play. That's almost 28 times this year's estimated free cash flow, or 20 times the free cash flow Wall Street expects the business to generate in two years. In comparison, the S&P 500 trades at 22 times this year's expected free cash flow.

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AI wins make the index appear pricey. But I'm not selling since the profits will be useful when the chatbot columnists take control.

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