Will AI keep driving the stock market up? | AI Weekly Review

1.Most AI stocks rose last week, Microsoft shares hit a new high

2.Adobe raised its annual performance expectation, becoming the trendsetter of software companies

3."AI Android moment" is really here!

4.McKinsey report: What industries will be most impacted by AI?

5.Institutions say AI will  keep driving the stock market up

6.How to deal with the AI boom? Investing in infrastructure is the best strategy

7.Can AI help U.S. stocks grow bullishly? The key depends on the profit increment

Microsoft's $10 billion investment in OpenAI looks like one of the best deals of the century. The new Bing chatbot with GPT-4 and Copilot, a new "all-in-one assistant," are being introduced and used in the Microsoft family bucket. Microsoft continues to make moves to demonstrate its determination to "Alll in AI" on all fronts.

Microsoft CEO Nadella recently mentioned in an interview that his dream is for 8 billion people on earth to have an AI tutor, an AI doctor, an AI programmer, or even an AI consultant!

"That means 8 billion people can live a rich life. That would be a wonderful world."

Morgan Stanley recently raised its price target on NVIDIA to $500 from $450 and expects NVIDIA's data center business to drive most of its growth over the next five years as the generative AI boom creates a strong environment for AI/machine learning hardware solutions - of which NVIDIA is the most important.

NVIDIA is one of the most important of these companies. At the same time, incremental opportunities for AI/machine learning software and services, networking and ADAS could lead to further growth.

With channel inventory clearance and new demand for Series 40 gaming products, Morgan Stanley expects NVIDIA's gaming business to return to a more stable and sustainable long-term growth of 10%.

Adobe, a design software provider, announced its fiscal year 23 second quarter results as of June 2. According to the report, Adobe's revenue for the quarter was $4.82 billion, a 10% year-over-year increase, higher than analysts' expectations of $4.77 billion. GAAP EPS was $2.82, also exceeding analysts' target range of $2.65 to $2.70.

What is particularly exciting to the market is that Adobe raised its full-year revenue and profit guidance, and said that the boost of AI to the business will be further reflected in the March and fourth quarter earnings; and the management repeatedly stressed in the conference call that Adobe's technology innovation can "lead a new era of AIGC".

From the recent trend of the U.S. stock market, the logic behind Adobe's share price growth is similar to that of NVIDIA. NVIDIA represents the AI hardware side, and its growth has been proven by its performance. Adobe represents the AI software side, the performance verification node compared to direct hardware sales of NVIDIA to be a little later, or need to wait until the third quarterly report in August to manifest.

However, Adobe's business layout and frequent actions in the field of AI, the market is inclined to believe that AIGC will bring incremental performance is not empty talk.

CICC recently issued a research report that generative AI will reshape the underlying logic of tool software, and there is a lot of room for imagination.

Tool software, in common parlance, is software that is used in everyday life to help us accomplish specific tasks better and more efficiently. For example, we use word processing software to write articles, drawing software to create pictures, etc.

Shen Wan Securities recently published a research report, similar to Duolingo, Notion, Spotify and other overseas companies, after the launch of AI products, have begun to increase the subscription price of their services.

It is not difficult to look ahead to the performance imagination from price increases for AI value-added services. In the short term, software companies that are the first to monetize AI innovations may have greater financial certainty. Those companies that are similar to Adobe and can successfully solve practical problems in work life with the power of AI may become the market darlings of a new round of Hype after the AI software explosion.

In February this year, Meta made a big splash in the AI field by releasing the first version of its open-source Large Language Model (LLM), known as Meta AI (LLaMA), which helps researchers develop low-cost alternatives to proprietary AI software.

LLaMA was licensed for research purposes only, but it swept the industry. Researchers have used it to develop open source LLM such as Vicuna, and its function is said to be close to the proprietary version in some indexes. Proprietary AI software has become a major source of revenue for ChatGPT creator OpenAI.

Meta will benefit from the release of open source AI models. meta CEO Zuckerberg said on a conference call with stock analysts in April that as developers adopt and improve these models or patch their security vulnerabilities, Meta will be able to integrate these improvements into its own AI models for consumer and advertising products.

However, because Meta has previously chosen to release LLaMA under a research license, the open-source big language models spawned so far cannot be used for commercial purposes, which limits its promotion and replication in commercial applications. a commercial version of LLaMA may spur greater use of the software.

On June 14, the consulting firm McKinsey released a research report entitled "The Economic Potential of Generative Artificial Intelligence", in which analysts explored the impact of AI on the global economy through a study of 850 occupations in 47 countries and regions (more than 80% of the global workforce), which industries will have the greatest impact and which people are facing the threat of unemployment. Which industries will have the greatest impact and who will face the threat of unemployment?

According to the McKinsey report:

1. AI is expected to replace human jobs 10 years earlier than expected, with 50% of occupations gradually replaced by AI between 2030 and 2060 (with a midpoint of 2045).

2, AI can bring $2.6 trillion to $4.4 trillion growth to the global economy each year, with productivity increasing by 0.1%-0.6%, equivalent to the annual contribution of a UK GDP.

3、Globally, AI is beneficial to the development of various industries, but not to individuals, and the impact is greatest on highly paid, highly educated brain workers.

4, generative AI brings value growth, mainly (about 75%) concentrated in four areas: customer operations, marketing and sales, software engineering and research and development, which also means that four businesses are most affected by generative AI. 5, generative human AI and other technology development may make 60% to 70% of the current work to achieve automation. Among them, the banking industry, high-tech industries and life sciences and other industries are the most affected.

Investment bank Wedbush Securities analyst Dan Ives recently said that technology stocks are likely to continue to move higher this year, possibly by 10% to 12%, especially as the Federal Reserve slows the pace of interest rate hikes and the convergence of artificial intelligence with everything looks more like the next industrial revolution.

Ives believes that "the risky trading momentum will continue as investors focus on the AI revolution and the positive chain reaction to software, consumer digital advertising companies and the NVIDIA-led chip industry.

Ives said, "In short, while valuations will be paramount for technology stocks, we still believe that artificial intelligence is driving the technology sector toward a '1995 moment' with future growth we haven't seen since the 1990s.

Chris Harvey, a strategist at Wells Fargo, agrees that with the Fed pausing to raise interest rates, "it will take mega AI companies to the 'next level'. If 1999/2000 is anything to go by, the 'new economy stocks' won't decline until the economy and 'old economy stocks' decline, and that may not happen until the Fed raises rates above 6%," Harvey added.

Mark Baribeau, head of global equities at PGIM's Jennison Associates, shares his thoughts on AI in an interview. He is the lead manager of PGIM Jennison Global Opportunities Fund, which has outperformed 99% of its peers with a gain of more than 30% so far this year.

Baribeau said large-cap stocks have led the rally in U.S. stocks this year because they generate some of the highest free cash flows of any global stock market. "Because you don't have to take a lot of risk to participate in a market rally. Investors are still wary because the Fed is tightening monetary policy so much. So I'm not saying people are looking for safety, they're looking for quality. So they're benefiting from that."

He also believes that the AI boom has ignited a catalyst for future growth. But as we head into earnings season this summer and fall, you have to be careful because you don't want to invest in stocks that are participating in the rebound but don't really have anything new to offer the market, and those stocks could be corrected.

Baribeau believes that because we are still in the development phase. Apps are just being developed, and this will be a structural change in technology over the next decade. It's the biggest thing that's happened since the advent of the mobile Internet. So we're very excited about it. But the best way to get involved in AI is through the infrastructure needed to do this kind of computing. So starting with high-end semiconductors, starting with cloud-based workloads, I think investors are going to do very well in that area. And then as we move forward, you'll see more and more software applications embedded in this technology -- it's already started, but it's going to accelerate in the next year. It's not a long term thing. You don't have to wait three to five years to know what's going to happen. It's going to start coming into every application - and that's very important for productivity targets over the next four quarters.

Then we'll start to see the differentiation, like who has the winning approach, who's developing unique applications that we never dreamed of. It could be an old company, it could be a new company, we don't know. But the important thing is that this is a real technological advance. It will be used aggressively. So I think investors should definitely try to be prepared.

Wall Street bank Goldman Sachs recently released a report titled "How far can artificial intelligence boost the U.S. stock market? The Goldman Sachs research team wrote in the report that generative artificial intelligence (generative AI) will likely boost corporate profits, which is critical for U.S. stocks to move.

Goldman Sachs' team of economists expects that the adoption and popularity of AI could increase production rates by 1.5 percentage points per year over 10 years, and analysts on Goldman Sachs' research team expect the compound annual growth rate of S&P 500 earnings per share to be 5.4% over the next 20 years, while their dividend discount model currently assumes a compound annual growth rate of 4.9%, meaning that the fair value of the S&P 500 will be higher than the fair value of the S&P 500. This means that the fair value of the S&P 500 will be approximately 9% higher than it is today.

Goldman Sachs said global chip companies are arguably the most direct beneficiaries of generative AI, as AI systems require powerful computing power to drive large language modeling algorithms.

In addition, Goldman Sachs technology industry analysts estimate that the total potential market for generative AI enterprise software is about $150 billion, assuming a 30 percent adoption rate.

This potential revenue pool represents only about 1 percent of total current S&P 500 sales and could take several years to capture. However, Goldman Sachs analysts write, "The incremental increase in overall economic output could translate into significantly higher revenues and profits for S&P 500 component companies, even over those most directly involved in AI development."

Given the difficulty of predicting the timing and ability of companies to profit from AI, Goldman Sachs analysts say investors are unlikely to fully digest the optimism generated by AI in the near term. Depending on a range of productivity scenarios, the rise in fair value of the S&P 500 could be as small as +5% to as large as +14%. In addition, the boost in profitability from AI could also amplify the boost to U.S. equities.

While AI-driven human progress holds great promise, analysts at Goldman Sachs point out that the Internet bubble shows the risks associated with investors' over-expectations are ever-present. In the late 1990s, fast-growing Internet technology companies saw their valuations plummet as they failed to meet investors' optimistic expectations, despite increased sales. Analysts at Goldman Sachs wrote: "Stocks with high growth potential receive high valuations, but the slightest sign that growth rates may not be sustainable sends investors fleeing in droves, which in turn causes multiple plunges."