Lexicon Financial Group Weekly Update — May 8, 2024
“As AI becomes the new infrastructure, flowing invisibly through our daily lives like the water in our faucets, we must understand its short- and long-term effects and know that it is safe for all to use.”
From the desk of Craig Swistun, CIM, MFA-P, Portfolio Manager, Raymond James Investment Counsel, and Wayne Hendry, Client Relationship Manager, Raymond James Investment Counsel
Looking Around
Recently the USA News Group reported on the sustained growth and impact of artificial intelligence (AI) in the global economy, highlighting that AI's influence is undeniably extensive and here to stay. (1)
For regular readers, this will come as no surprise: we’ve talked about AI for some time as one of the reasons behind the positive stock market performance in recent months. Moreover, Nvidia, the poster stock for AI, has seen its stock price soar as it is the leading manufacture of the computer chips that are powering the AI revolution. It, along with a handful of technology companies - Alphabet, Amazon, Apple, Meta, Microsoft, and Tesla - known as the so-called "Magnificent 7", have boosted major stock markets thanks to investor optimism about technology, including AI. According to Reuters, the Magnificent 7 accounted for nearly two-thirds of the United States (U.S.) market’s gain in 2023. Microsoft, the most valuable company in the world, has seen its shares soar nearly 75 per cent since the beginning of last year. This increase in its share price began with an announcement by Microsoft in January 2023 that it was investing USD10 billion in OpenAI, the artificial intelligence firm that developed ChatGPT. Months later, Microsoft's Bing became the default search engine for ChatGPT. Apple, the world's second largest company by market cap, is working on plans to incorporate generative AI into all of its devices. And in March this year, Nvidia became the third-largest company by market cap globally. The market for generative AI looks primed for growth in the coming years.
Source: Bloomberg
To say the least, more than a few analysts are bullish on stock markets and acknowledge the concentration at the top. They expect the AI-driven gains to broaden as smaller companies gain traction to pick up their piece of the expanding pie.
There are always skeptics who point to what they consider a lack of evidence that AI will be of use to firms beyond a narrow set of tech juggernauts. Without wider adoption, they say, the AI market phenomenon could fade faster than the Bored Ape NFT (non-fungible token; does anybody even remember those?). A study released earlier this year by a group of researchers at major universities and federal agencies found fewer than six per cent of firms used AI-related technologies, though a majority of very large firms reported at least some AI use.
Kristina McElheran, a business professor at the University Toronto and a co-author of the study, said observers face the difficulty of accurately assessing private sector use of AI because there is not a single agreed-upon definition of the technology, and some companies are keeping their AI efforts secret. According to her, market euphoria about AI risks outpacing what appears to be modest adoption so far. (2)
AI could be the industrial revolution for the 21st century. According to the International Monetary Fund (IMF), it has the potential to jumpstart productivity, boost global growth and raise incomes around the world. Because AI is currently being driven by some of the world’s largest companies, our investors are already exposed to this growth through investments in iShares Core S&P 500 ETF (ETF: IVV) or Invesco QQQ Trust Series 1 (ETF: QQQ). IVV seeks to track the investment results of an index composed of large-capitalization U.S. equities and the technology sector accounts for 30 per cent of this index. The QQQ is a proxy for investing in the NASDAQ exchange, which also includes a healthy dose of technology companies and including almost all of the Magnificent 7.
What is important to note is that technology companies have been the drivers of economic progress for many years now. Between 1995 and 2004, when measured on an annual basis, General Electric was the largest company in the U.S. for seven out of those 10 years. The other leader at that time was Microsoft. Then followed an eight-year period where ExxonMobil ruled the roost as the largest company, but since 2012 that title has been held by the tech sector – specifically Microsoft (2019, 2020) and Apple (all other years including 2023).
America’s Most Valuable Company Every Year Since 1995
Cell phones, computers, operating systems and now AI have all introduced fundamental changes to the way we work. There is no way to put the genie back into the bottle now. For the moment, the large players have early mover advantage. We continue to provide investors with exposure to these economic areas but are keeping an eye on things because they can (and do) change quickly.
Looking Back
The Toronto Stock Exchange’s S&P/TSX composite index (TSE) rose last Friday boosted by technology shares, which advanced the most in the day, led by e-commerce firm Shopify Inc. (Shopify), which was up 3.4 per cent. Shopify is the third biggest company in Canada by market capitalization. (3)
Weekly North American Market Statistics
| Index | Week's Change | Year to Date |
| S&P 500 | 0.5% | 7.5% |
| Nasdaq Composite | 1.4% | 7.6% |
| Dow Jones Industrial Average | 1.1% | 2.6% |
| S&P/TSX Composite Index | -0.1% | 4.7% |
Source: Associated Press and FactSet 05/3/2024
Read and Watch
Want deeper insight into topics in your Weekly Update? Then, read and/or right click:
Video: What is AI – Museum of Science
'Magnificent Seven' tech stocks lose steam as AI hype fades – Yahoo Finance
Video: Who Will Win the AI Race? The U.S. or China? – Bloomberg Television
Even 1.4 billion people can’t fill all of China’s vacant homes, ex-official admits
U.S. markets ended higher following a volatile week featuring a raft of economic and earnings data. Of the 11 major sectors in the S&P 500, all but energy ended the session in positive territory, with technology claiming the largest percentage gain at 3.0 per cent.
Last week was the second-busiest week of first-quarter earnings reports, and a positive reception to Apple’s earnings release after the close of trading on Thursday appeared to help drive a rebound in overall investor sentiment. Apple beat consensus revenue expectations and enthused investors by announcing that it would buy back USD 110 billion of its own shares - the largest such repurchase in history. That said, the main driver of last week’s gains appeared to be Friday morning’s nonfarm payrolls report, which showed that employers added 175,000 jobs in April. This was less than expected and the lowest number since November 2023. This signalled a cooldown in the labour market, and therefore lower inflationary pressures, but investors may have been more pleased by a surprise slowdown in monthly wage increases, from 0.3 per cent in March to 0.2 per cent in April. The year-over-year gain fell to 3.9 per cent, the slowest increase in almost two years. Similarly, average weekly hours worked fell back slightly, while the unemployment rate climbed slightly to 3.9 per cent.
All of this was good news given the upside inflation and (more distinct) downward growth surprises earlier in the week. This combination has added to recent anxieties over emerging “stagflation” trends. Markets fell sharply last Tuesday after the Labor Department reported that employment costs rose 1.2 per cent in the first quarter—or an annual rate of nearly five per cent—which was above expectations and the fastest pace in a year. A separate report showed home prices rising in February at their fastest pace in eight months.
In Europe, the pan-European STOXX Europe 600 Index ended 0.48 per cent lower as investors appeared to have become more cautious amid mixed corporate earnings and uncertainty surrounding the outlook for interest rates after June. Major stock indexes ended the week mixed: Germany’s DAX weakened 0.88 per cent, France’s CAC 40 Index lost 1.62 per cent, and Italy’s FTSE MIB declined 1.81 per cent. The UK’s FTSE 100 Index, however, added 0.90 per cent, driven to a fresh high by strength in mining and energy stocks.
European government bond yields generally declined, as policymakers downplayed growing concerns about the potential further interest rate increases by major central banks. The yield on the German 10-year government bond fell toward 2.5 per cent, while the yield on 10-year UK government bonds also eased.
Markets in Japan generated positive returns last week as perceptions grew that Japanese authorities had intervened in the foreign exchange markets twice during the week to prop up the yen. The Nikkei 225 Index rose 0.8 per cent and the broader TOPIX Index gained 1.6 per cent. Despite some intraweek volatility, the yield on the 10-year Japanese government bond finished the week broadly unchanged at the 0.9 per cent level, almost a six-month high. This was due to strong U.S. wage data raising concerns that the Federal Reserve will keep interest rates higher for longer.
In China, markets rose in a holiday-shortened week on hopes of greater Chinese government support. China’s top decision-making body, the 24-member Politburo, pledged to implement prudent monetary and fiscal support to shore up demand at its April meeting last Tuesday. Officials stated that China would make flexible use of monetary policy tools to restore growth, including possible cuts to interest rates and the reserve requirement ratio, which sets the amount of cash that banks must set aside in reserve. The Shanghai Composite Index gained 0.52 per cent, while the blue-chip CSI 300 edged up 0.56 per cent. In Hong Kong, the benchmark Hang Seng Index added 4.67 per cent. (4)
The opinions expressed are those of Craig Swistun and not necessarily those of Raymond James Investment Counsel which is a subsidiary of Raymond James Ltd. Statistics and factual data and other information presented are from sources believed to be reliable, but their accuracy cannot be guaranteed. It is furnished on the basis and understanding that Raymond James is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. Raymond James advisors are not tax advisors, and we recommend that clients seek independent advice from a professional advisor on tax-related matters.
AI revolution: Tech giants propel market growth, Freschia Gonzales, Wealth Professional, May 7, 2024
AI is driving a stock market rally. What if the technology falters?, Max Zahn, ABC News, March 5, 2024
The close: Major North American indexes rise as mega-cap tech stocks rally, The Globe and Mail, April 26, 2024
Global Markets Weekly Update, T. Rowe Price, April 26, 2024
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Looking to Learn?
If you want to know more about some of the topics we wrote about this week, just click on the links below:
What Is Artificial Intelligence (AI)?
Infographic: Generative AI Explained by AI
AI vs. Humans: Which Performs Certain Skills Better?
The Largest Companies by Market Cap in 2024
AI Will Transform the Global Economy. Let’s Make Sure It Benefits Humanity