June 3, 2024
The heavy implications of Nvidia’s
AI-fuelled market domination
Dear Reader,
Every year, ARK Invest publishes its Big Ideas research report.
You won’t be surprised to know what leads 2024’s edition.
Perhaps wary of AI fatigue, they characterize their main big idea as ‘Technological Convergence‘, explaining that:
‘Catalyzed by breakthroughs in artificial intelligence, the global equity market value associated with disruptive innovation could increase from 16% of the total to more than 60% by 2030. As a result, the annualized equity return associated with disruptive innovation could exceed 40% during the next seven years, increasing its market capitalization from ~$19 trillion today to roughly $220 trillion by 2030.’
Disruptively innovative stocks — ARK’s specialty — could explode in value by more than 1,000%.
In other words, the AI revolution might still be in its infancy.
A thousand percent boom, after these past two years? Come on.
That prediction, of course, presumes the AI story continues to go from strength to strength.
Which means…
This time has to be different?
If you hadn’t heard, Nvidia is now the eighth biggest country in the world.
The chipmaker’s market capitalization at the time of writing is $2.62 trillion.
That’s more than every country bar France, the U.K., India, Japan, Germany, China and the U.S.A.
In other words, the AI powered ‘disruptive innovation’ ARK refers to has catapulted a single listed company among the top 10 wealthiest nations.
Last month, Nvidia’s share price made another new all-time high on the back of its latest blockbuster earnings announcement.
Ever since Open AI’s ChatGPT launch vaulted the promise of this technology into the mainstream consciousness, Nvidia, and as you can see in the chart below, the broader semiconductor market, has been on a relentless tear higher.
‘Catalyzed by breakthroughs…’
Source
But that brings us to the topic — or perhaps its more of a question — of this week’s email.
Is it really possible that the AI story has only just begun?
That Nvidia and other ‘disruptive innovation’ companies can continue to break earnings and valuation records for quarters and years to come?
Or is this simply the latest version of the stock market and economy’s favourite cynical quip; This time, it’s different.
Take a look at this:
Source
This shows you 100 years of stock market concentration — the extent to which the market’s biggest companies make up the its total valuation.
The Kobeissi Letter explains the chart:
According to Goldman Sachs, the market cap of the largest stock is now 750 TIMES the market cap of a 75th percentile stock.
To put this in perspective, even at the peak of the 2000 Dot-com bubble the metric only hit 550x.
We officially have a higher stock concentration than the peak of the Great Depression in 1932. The top 10% of stocks in the US now reflect ~75% of the entire market.
Big tech IS the stock market.
You see the implication. The chart shows that high market concentration roughly lines up with bubbles, crashes and/or geopolitical disturbance.
But if you listen to some of the market’s most respected commentators and analysts, this is not a problem.
ARK’s Big Ideas report makes clear that they think AI will only compound Big Tech’s power to expand valuations from here.
Citi sees Nvidia’s record-breaking performance continuing:
Goldman Sachs takes it a step further:
They claim:
‘While investors usually think of elevated concentration as a sign of downside risk, during the 12 months after past episodes of peak concentration the S&P 500 rallied more often than it declined.’
History never/sometimes/always repeats
This email is not about swinging your opinion or influencing your investment decisions.
We write it merely to give you ideas you might not otherwise discover or consider, because we believe — like Benjamin Franklin — that knowledge pays the best interest.
It’s with this in mind that we close this week’s edition with some knowledge that many living and investing today have perhaps forgotten.
Astounded, distracted and swept up in the novelty, promise and seemingly limitless future that AI represents, we call all-too-easily allow ourselves to think ‘this time it really is different‘.
In September 1929, what’s now known as The Great Crash began on Wall Street. The broader economic crash that followed, of course, was The Great Depression.
Here’s a selection of newspaper headlines from 1929 — before and during The Great Crash:
Wave of Buying Sweeps Over Market as Stocks Swing Upward
Radio Flashes High; General Motors and Steels Soar
— The World, March 15, 1929
Stocks Soar As Bank Aid Ends Fear of Money Panic
— New York Herald Tribune, March 28, 1929
Banker Says Boom Will Run Into 1930
— The World, March 30, 1929
Very Prosperous Year Is Forecast
— The World, December 15, 1929
More headlines and articles here.
That’s it for this week’s The Benchmark email.
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Invest in knowledge,
Thom
Editor, The Benchmark
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