It looked like some of the excitement about artificial intelligence was about to cool when a blow-out earnings report by Nvidia (NVDA) shocked the market on Thursday. Forward guidance was breathtaking and price targets were moved sharply higher.
Artificial intelligence is being called the most significant technological development since the advent of the Internet. It is expected to change the way the world functions and have a significant impact on the economy and business.
The technological evolution that is occurring is not unlike what happened back in 1999-2000 when the Internet age was embraced and changed the world. There was a wild stock market bubble that caused a top in the Nasdaq that wasn't surpassed until 15 years later.
Significant changes in technology naturally lead to bubble-like stock market activity. Everyone wants a piece of the action and they are willing to pay very high prices to have exposure. Those who chased stocks such as Amazon (AMZN) and Alphabet (GOOGL) paid very high prices, but in the long run it was the best investment they ever made.
The AI action has been creating another bubble as big investors don't want to miss out on a generational shift in technology. However, there is one big shift this time-the leading AI names are all well-known, big-cap stocks such as Microsoft (MSFT) and Nvidia.
In 1999-2000 there were hundreds of stocks looking to leverage Internet technology. Many micro-caps went crazy and small speculative traders made a fortune buying junky stocks for quick trades.
The current AI bubble has been completely different -- perhaps it isn't even a bubble at all -- but it has been limited to a handful of big-cap stocks. These stocks are big enough to move the indexes and create the illusion of broad strength, but there are very few stocks participating in this celebration of new technology. There is almost no speculative action in small-caps or secondary stocks. It is a very limited big-cap phenomenon, and therein lays the great challenge for investors.
Typically, world-changing technologies create a flood of entrepreneurs looking to exploit the situation. They start new enterprises and are extremely creative in finding commercial operations. Perhaps that will happen to a great degree when AI develops further, but it is not apparent in the stock market now.
The net result is that we are stuck with this unusual market environment where the vast majority of stocks are struggling with bear market conditions while a very small group benefits from the AI revolution. Traders that are looking for opportunities outside of the Fab Five big-cap names are finding nothing and are punished for even trying. Speculative trading is extremely poor.
We will need to wait and see how this evolves, but there is no historical precedent for this. The most recent comparison is electric vehicles (EVs), and that broadened very quickly after the early success of Tesla (TSLA) .
Despite the excitement about AI, this is one of the toughest trading markets I've ever seen. We are likely to see mixed and choppy action here on Friday as the focus will be on the debt-ceiling issue. We have mild action in the early going.