by Krystal Daibes Higgins, CFA
Vice President Equity Research
Earlier this week we celebrated the one-year anniversary of the 2022 stock market bottom. At that time, inflation was hitting multi-decade highs while 100% of economists surveyed by Bloomberg were forecasting a recession within 12 months. Fortunately, the U.S. economy has held up better than expected, resulting in a strong bounceback in stocks. The S&P 500 is up over 20% from the bottom, however, this rally has not been broad-based. Small cap stocks measured by the Russell 2000 are only up 4%, while large cap tech stocks are up over 50%. While there may be several reasons for this bifurcation, one of the key themes is artificial intelligence (AI), with companies involved exhibiting very strong equity performance.
In May of 2017, Go world champion, Ke Jie, was being watched by a couple of hundred million people when he took on AlphaGo, a Google-backed AI Go Game. The game of Go is an ancient Chinese board game that requires “intellectual refinement and wisdom” according to Kai-Fu Lee’s AI Super-Powers book. While the rules are simple, the number of possibilities are endless. Unfortunately for Ke Jie, the highly anticipated event took a turn south as he ended up crumbling in tears in the final few minutes and was defeated by his AI opponent. While the world sympathized with the 19-year-old, scientists and engineers marked a new major milestone in the advancement of AI.
Since AlphaGo’s victory over Ke Jie, the advancement of AI has moved rapidly. But like a train leaving a station, AI is just picking up steam and is heading toward radically transforming the job market. While it is understood that AI’s latest advancements will disrupt and displace various types of jobs, it’s less understood how it will boost productivity and create new opportunities over the long term. Workers, investors, AI specialists, policymakers and even self-proclaimed futurists are still grappling with what it means for the job market, productivity and the global economy. Experts believe the job market will have two phases: internet AI and business AI.
The first phase is what we’re experiencing now in which AI-powered companies, such as Google (Alphabet) and Facebook (Meta), have already impacted the job market by altering traditional industries, such as advertising, customer service, shopping and manufacturing. As most of us have experienced in the last couple of years, especially business owners, this disruption has only tightened the job market with the creation of new jobs across sectors and industries. It gave rise to the “gig” or “freelance” economy, which is currently estimated to be 73 million workers and expected to continue growing as we enter the second phase.
The second phase is business AI, which refers to the use of AI within organizations to improve efficiency, decision-making and operations. We are already seeing a rapid deployment from technology firms, greatly enhancing the value to customers by extracting insights that lead to cost cutting and higher profits. The second phase is where we will potentially see a much greater disruption that will lead to dramatically improved productivity levels and new opportunities in the longer term.
Goldman Sachs estimates that 40% of jobs are exposed to some degree of AI automation, particularly within the office and administrative support segment. However, exposure to AI does not necessarily mean complete replacement. Instead, it should be seen as a tool that enhances human capabilities. For example, AI can assist doctors and researchers in diagnosing diseases more accurately and allow healthcare professionals to focus on patient care rather than administrative tasks. For an administrative assistant, it will improve their ability to facilitate the smooth operation of an office or organization.
The potential for AI’s advancement has far-reaching consequences. While we will see some job displacement, the potential for human-AI collaboration and the emergence of new opportunities will outweigh the pain from short-term disruption.
Market Update
The market is slightly up this week as measured by the S&P 500 as investors get ready for the next wave of earnings reports. Starting with banks, investors will get a better glimpse of the health of the banking sector and the consumer segment. For the quarter, it’s expected that blended earnings will be up roughly 1.3% and revenues up 0.9%. Excluding the energy sector, earnings growth is projected at 6.2%, making it the second consecutive quarter of positive ex-energy growth. As the S&P 500 has fallen from its high of more than 20% above the 2022 bottom earlier this year to 12% today, the valuation is trading in line with historical estimates.
Earlier this week the producer price index (PPI), which measures the average change of prices received by domestic producers, came in slightly higher than expected, though inflation trends are still largely declining.
Takeaways for the Week
The advancement of AI is likely to significantly transform the jobs market over the long term
Both employees and businesses will need to embrace AI and adapt to keep up with new competitive challenges
Third quarter earnings season is about to begin starting with banks, which will give investors new data points on the health of the economy and consumer