Artificial Intelligence (AI) has become the driving force behind the remarkable performance of the “Magnificent Seven” tech stocks, bolstering the stock market this year. However, Bill Smead, President of Smead Capital Management, has expressed concern that this AI frenzy is exaggerated and warns of potential losses once the hype subsides. In his memo titled “Artificial (Stock Market) Life Support,” Smead criticizes the whole concept as disingenuous.
Smead argues that AI is not a new development, as these Big Tech companies, including Amazon, Alphabet, Apple, Microsoft, Tesla, Meta, and Nvidia, have been working on and utilizing AI for the past decade. He further states that rising interest rates diminish the value of futuristic earnings generated from exciting technology, as these earnings are discounted to their present worth. Additionally, Smead points out the lack of transparency exhibited by these companies, referring to Amazon and Alphabet’s ongoing legal battles with the US government.
The experienced investor highlights the vital role played by the Magnificent Seven in maintaining the rally of the S&P 500 index this year. He emphasizes how the top 10 stocks, based on market capitalization, have accounted for an unprecedented 96% of the index’s performance in 2023, thereby safeguarding the massive amount of capital invested in passive index funds.
Smead suggests that if these high-flying stocks were to experience a downturn, investors would lose faith in the market and withdraw their investments. He views AI as a sort of life support for both tech stocks and the S&P 500 index, expressing concerns over a potential stock market failure.
This is not the first time Smead has raised alarm bells about the market. In August, he compared the AI-driven tech frenzy to the dot-com bubble of the late 1990s, highlighting the magnitude of the situation.
While the AI boom has undoubtedly contributed to the success of these tech stocks, Smead urges investors to be cautious and consider the potential risks associated with heavily relying on these companies.
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