Bubble Questions Haunt America’s ‘Magnificent 7’ After Banner Year
2023's equity market is a story of "Magnificent 7" outperformance, and for many that's problematic.
A narrow rally is an unsustainable rally. Breadth is poor, and that's not a sign of a market in fine fettle. And so on.
Morgan Stanley's Mike Wilson will tell you all about it. "The outsized contribution of just seven stocks to the market cap weighted benchmark's return (and earnings) has left this year's equity market performance one of the narrowest on record," Wilson wrote, in his 2024 outlo
I would not bet against the magnificent 7 or the other 493 right now. I spent a couple days at a conference last week and also watched a few presentations on what vendors in my space are doing with AI and all I can say is that the innovation in generative AI is happening fast and the impact will be felt across industries. I suspect we’ll start seeing that impact in the earnings estimates for 2024, and it’ll expand more broadly in 2025.
From an employment perspective, AI is going to do to white collar jobs what outsourcing manufacturing to China did to blue collar jobs. I know historically innovation has created new opportunities, but there is going to be a lot of displacement which will have some big winners but a lot of losers.
One obvious example is programming. Can AI produce quality code right now? Maybe not on its own, but a 10x programmer with AI? Now that 10x programmer might become a 20x or 50x programmer compared to last year’s standard. An average programmer might still be able to multiply their effectiveness by a smaller factor, but the fact that they are likely to be more productive reduces the company’s headcount needs, organizational complexity, and competition for talent. With fewer people who need to be involved, the efficiency gains are compounded.
Another example is sales. If every sales rep effectively has their own assistant to take notes, automate follow ups, identify the right prospects, and tailor content, that significantly reduces the administrative overhead. Now I don’t need as many people and I can keep my best reps. Suddenly, I’ve got lower headcount cost, my deals close at a higher rate, and I don’t need as much support staff. Again, the efficiencies compound and margin and growth both go up.
That’s at a micro level, but what about the macro? Well, I think we’ll initially see some major productivity and profitability gains across the economy in the near term, but what happens if people are displaced en masse? I doubt UBI would become a reality soon enough to offset what will likely be a significant increase in unemployment. We’ll also see new markets that are built on hyperpersonalization (think travel agents or book writing or video games), but I’m not sure how much employment that will create. I would not be surprised if we are once again struggling with near zero inflation and ZIRP.
I’ll just end by saying that the CEO of the company that was hosting the conference said during his keynote that they don’t think their innovations will eliminate jobs, but I’d take the opposite side of that wager…or just bet on the market since that’ll likely benefit from the combo of AI’s impact on productivity and the return to ZIRP.
IBM recently commented on the takeup of their AI offerings (built on the old Watson base). Like you, they pointed at coding, customer relations and human resources management. All important functions, but a far cry from predictions by academics and sell-siders speaking of AI revolutionizing every aspect of life. Or, so we should hope!!
On a related note, what a time to be a tech worker! First “outsourced to India” and now this. And to think coding and such was once widely seen as a lucrative and stable career.
But at least one wiser person than I sides with Mr. Dayjob:
https://finance.yahoo.com/news/ai-create-largest-displacement-human-193018798.html
The fact is that since 1/1/2022, SPY is down about 5% and the Magnificent 7 are, in aggregate, up about 4% – almost entirely due to Nvidia more than offsetting the declines in Tesla and Amazon. The remaining 4/7 are currently priced pretty close to their prices as of 1/1/2022.
From 30,000 feet, a number of plausible stories could be written based on this fact pattern.