Revolution or market bubble? Investors weigh the AI boom

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What’s the difference between a revolution and a market bubble?

Often, it’s time and patience — two things that Wall Street is notoriously lacking.

But as the artificial intelligence boom reaches into more areas of workers’ lives and sends stocks hurtling sky high, some investors worry about whether AI is the real deal and what happens if it isn’t.

What’s happening: Shares of Nvidia have exploded higher with no end to their upward trajectory in sight. The California chipmaker’s stock is about 240% higher over the past year, and it isn’t alone.

AMD is up 126.5% since a year ago, and Taiwan Semiconductor Manufacturing Co stock is nearly 50% higher over the same period.

The so-called Magnificent Seven tech stocks — Apple, Microsoft, Nvidia, Amazon, Google, Meta and Tesla — that dominate the S&P 500 have also benefited greatly from AI buzz. They’re collectively up about 55% over the past year.

Large companies, meanwhile, are already shifting their resources to invest heavily in AI technology and are sometimes laying off employees in anticipation of an increase in productivity through automation.

“This is not hype,” JPMorgan Chase CEO Jamie Dimon told CNBC on Monday of AI.

Dimon, who is often skeptical of new technologies and fads, said that there are about  200 people at JPMorgan dedicated to researching generative AI.

“When we had the internet bubble the first time around… that was hype. This is not hype. It’s real,” he said. “People are deploying it at different speeds, but it will handle a tremendous amount of stuff.”

Not everyone is convinced: The top 10 companies in the S&P 500 are more overvalued today than they were during the tech bubble in the mid-1990s, wrote Torsten Slok, chief economist at Apollo Global Management, in a note to investors on Sunday, citing the companies’ price to earnings ratios.

The growth of these companies has created a Teflon stock market — nothing bad seems to stick to it, even higher-than-expected inflation data and delayed expectations for interest rate cuts by the Federal Reserve, said Yung-Yu Ma, chief Investment officer at BMO Wealth Management.

“The idea that AI can unleash both spending and productivity is a strong narrative that markets are focused on right now,” he said.

But that sole focus on AI is worrisome.

“Thoughts of the mid-1990s (tech boom) are creeping into today’s equity market, as during that time the ensuing productivity boom propelled equities for years despite relatively high interest rates,” he said. “The current hype may be slightly more advanced than what AI can deliver in the near-term for productivity gains.”

Looking under the hood: Some shareholders are also worried about Big Tech’s Investment in AI.

Apple is reportedly on track to spend $1 billion a year on generative AI.

Two very large Apple investors, Norges Bank Investment Management and Legal & General, have said that they will support a resolution at the company’s annual shareholder meeting Wednesday that would require the iPhone maker to disclose and report AI-related risks.

The proposal asks the company to “disclose any ethical guidelines that the company has adopted regarding use of AI technology.”

The shareholder proposal was introduced by the union federation AFL-CIO.

In a filing to the US Securities and Exchange Commission, Apple proposed the vote be skipped. Lawyers for the company argued that shareholders were being too controlling by requesting the disclosure of AI risks.

The SEC disagreed.

“In our view, the proposal transcends ordinary business matters and does not seek to micromanage the company,” the agency wrote.

Number of 401(k) ‘millionaires’ jumped 41% last year, says Fidelity

Many more new 401(k) “millionaires” were created last year, but the overall number remains low, according to data released Tuesday.

Thanks to strong performances in stocks and bonds in 2023, coupled with steady savings rates and employer-provided matching contributions, 401(k) investors ended 2023 very much in the black, reports my colleague Jeanne Sahadi.

That’s according to new fourth-quarter data from Fidelity Investments, one of the largest providers of workplace retirement plans that cover 23 million 401(k) participants.

The average 401(k) balance rose to $118,600 at the end of the fourth quarter, up 14% for the year.

Among Gen Xers, the demographic cohort that will start retiring over the next decade, Fidelity found that the average 401(k) balance topped $500,000 among those who have been saving for at least 15 years consecutively.

Fidelity also reported that the number of 401(k) accounts with balances of at least $1 million rose in the fourth quarter by 20%, to 422,000 accounts; and by 41% for the whole year. The average account balance for this group was $1,551,300 in the fourth quarter.

But market performance isn’t the only factor to credit for higher balances. Actual savings habits played a big role. Fidelity said that 27% of plan participants proactively increased their contribution rate throughout last year. And 78% of 401(k) savers were contributing at a rate high enough to get their employer’s full matching contribution.

Between employee and employer contributions, the average savings rate last year was 13.9%, up slightly from 13.7% a year earlier.

Beyond Meat’s stock surges after CEO promises to steeply cut costs in 2024

Shares of Beyond Meat skyrocketed in after-hours trading on Tuesday after the company promised to cut costs and transition to a “leaner operating structure” in its fourth-quarter financial report.

The troubled plant-based meat company, which has partnerships with McDonald’s and KFC owner Yum! Brands, has faced falling demand for its products and ballooning costs in recent years. But on Tuesday, the company announced a turnaround plan, reports my colleague Samantha Delouya.

“Our 2024 plan includes taking steps to steeply reduce operating expense and cash use,” Beyond Meat CEO Ethan Brown said in a statement.

Overall, Beyond Meat reported a 7.8% decrease in year-over-year net revenues to $73.7 million, beating Wall Street’s expectations for the quarter, according to Factset.

The report sent shares of Beyond Meat surging. The stock was up more than 70% in after-hours trading on Tuesday after falling more than 60% in the past year.

On a Tuesday call with Beyond Meat’s investors, Brown outlined a set of initiatives intended to rightsize the struggling company.

Brown said the company would cut at least $70 million from Beyond Meat’s operating budget in 2024. As part of those cuts, Brown said, Beyond Meat would “tighten” its focus and trim some of its offerings, discontinuing its Beyond Meat jerky line.

Brown said the discontinuation would allow the company to put its resources toward other products “which we believe have higher profitable growth potential.”

Beyond Meat did not specify whether it may conduct layoffs as part of its cost-cutting measures.