How the rise of artificial intelligence is boosting tech stocks

Geoff Bennett:

Rallies have driven both the Dow Jones industrial average and the much larger S&P 500 to record highs this week. There are several reasons for that, including investors' assessments of the economy right now and where it will be in the months ahead.

We're going to break this all down now with David Gura, business correspondent for NPR, who's been watching all of this carefully.

David, it's great to have you here.

So how much is the market rally connected to investors' expectations that the Fed is going to cut rates pretty soon?

David Gura, NPR Business Correspondent:

Yes, it's hugely tied to that, Geoff.

And we got this indication last year from the Federal Reserve that they were looking to make cuts in 2023. There's been some recalibration IN recent days of expectations of how soon markets think the Fed is going to actually do that, lower those rates.

But they're looking around, investors are looking around and seeing a bevy of economic indicators that are looking pretty strong. And they have this belief that the Federal Reserve, despite what seemed like small odds at the beginning of last year, the year before, are going to be able to engineer this so-called soft landing, that they're going to get high inflation under control without triggering a recession.

And that's certainly buoying the stock market. Now, I should say the gains haven't been widely shared. They certainly weren't last year, which ended up being a much stronger year for stocks than I think a lot of people expected, in light of what I was just talking about, that being this fear that we could hit a recession.

So we haven't had broad-based gains, but stocks have performed much better, I think, than Wall Street expected at the beginning of last year.

Geoff Bennett:

And there's also a lot of investor enthusiasm about artificial intelligence.

How has the promise of A.I. reordered the markets and really fueled the returns of the so-called Magnificent Seven? These are the high-performing tech companies whose stocks typically do really well.

David Gura:

Yes, Geoff, this was a huge turning point last year.

So you mentioned the Magnificent Seven. This is a name that was coined by Michael Hartnett, who's an investment strategist at Bank of America. He allowed that he's a fan of this Western movie from 1960 starring Yul Brynner and Eli Wallach, which is why he named them.

But the seven stocks are Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla. And as you say, these are tech companies, most of which are tied to A.I. or interested in A.I. or doing work on A.I. I guess Tesla is kind of the exception to that. Nvidia, at the other extreme, this is a company that is designing most of the microchips that are used in the supercomputers that are powering the technology that allows companies to use A.I.

So they have really outperformed the market. Last year, the S&P 500 was up 24 percent. Those seven stocks, they rose by more than 100 percent last year. So they have been carrying a lot of the weight here. And there are a number of reasons for that. A.I. is part of it.

Another just has to do with the fact that these are companies that are ingrained in our lives, that we use every day, that they would have staying power if there were going to be some sort of economic downturn. And, finally, they have a lot of cash on hand. We're at a point where interest rates are higher than they were for a really long time.

A lot of companies, if they want to expand, have to borrow money. They'd have to borrow money at a higher interest rate. These are seven companies that wouldn't have to do that because they have so much money on hand, Geoff.

Geoff Bennett:

And yet there are these influential voices injecting notes of caution, namely J.P. Morgan CEO Jamie Dimon, who says, look, there are all sorts of financial and geopolitical risks on the horizon. Here's what he said to CNBC earlier.

Jamie Dimon, Chairman, J.P. Morgan Chase:

I think it's a mistake to assume that everything's hunky-dory. And when stock markets are up, it's kind of like this little drug we all feel. Like, it's just great.

But, remember, we have had so much fiscal monetary stimulation. So I'm a little more on the question side, that we are facing a lot of things in '24 or '25. And we mentioned Ukraine, the terrorist activity in Israel, the Red Sea, quantitative tightening, which I still question if we understand exactly how that works. I don't think we do.

Geoff Bennett:

I mean, he's got a point. Why isn't the market apparently taking into account a host of geopolitical crises and the shipping challenges that result from it and all of the knock-on effects to the stock market and the economy, potentially?

David Gura:

It's a really good question, Geoff. And I think that these are all things that are worrying to some investors. I think they're kind of inured to the fact that we have been able to get through a lot of tumult and crises in recent months.

But Jamie Dimon stands out as the head of the largest bank in this country and somebody who is more frank and forthright about the prospect of these risks than I think a lot of executives are. You heard him there mentioning Ukraine, the war in Israel. These are topics that he returns to time and time again, because he is sort of looking at history with a really broad breath and fearing that this could have a big effect, not just on the economy, but on sort of the geopolitical system in the world as well.

So he's raising alarm about this. I think a lot of people listen to Jamie Dimon, again, because he's running such a large institution. But so far, we have seen markets kind of shrug that off. You look at what's happening in the Red Sea. We have seen shipping companies pull their ships out of that waterway, send them on a 10-day journey around Africa to avoid that conflict there.

We're beginning to see effects of this tumult. And I think it's something that, of course, Wall Street is going to continue to watch here in the days and weeks to come.

Geoff Bennett:

And we should be clear. The stock market is not the economy. But you could argue that, because of a number of factors, what happens on Wall Street is really intertwined with what happens on Main Street.

Do you see it that way?

David Gura:

Yes, it's important to look at these as discrete things, but you're absolutely right.

What we're seeing right now in the stock market is confirmation of the fact that the economy is doing pretty well, again, better than I think a lot of people expected it would be. So you look at the data points that we have gotten recently, look at retail sales. Those came in stronger than expected. We're going to get some figures on GDP, on growth later this week, another indication inflation.

We have seen the labor market remain really strong and resolute. What we're seeing is the market really embrace each of those economic data points, Geoff. It's kind of confirming this sentiment, this sense that the economy is doing well. And as we saw in a big survey of consumer sentiment last week, a lot of people, yes, investors, but consumers, the rest of us as well, are feeling more confident in the direction of the U.S. economy.

Geoff Bennett:

David Gura of NPR.

David, always great to speak with you. Thanks for being with us.

David Gura:

Geoff, thanks.