How important is AI in the current market?

📆This Week’s Topic

We’ve already talked about what the AI bubble is, but today we’ll be talking about the effects AI has on the currently-troubled stock market. With the rapid growth of AI, observers are considering whether we are seeing a boom, or a bubble similar the dot-com bubble in the 1990’s. (In both of those cases the growth based off an uncertain future about technology.) We’ll also focus on other factors that are contributing to the turmoil, and what stocks are falling due to the instability.

💳 Cause & Effect

This past week has statistically been the most uneasy week with regards to the stock market since President Trump’s “Tariff War” started in April. People investing in AI-related or based companies are now doubting their investments, because AI companies are losing money faster than they can earn it due to the high costs of operating and maintaining models. Basically, so much money and investment is being poured into AI, but the return is just not there, so investors are worried about spending more money on something with such a bad return.

📊 Statistics

Because of this, stocks are falling in the US, in Asia, and in Europe. Last Thursday the S&P 500 dropped 3.5 percent, the tech-filled NASDAQ index is down 7%, and a trade fund tracking AI stocks is down 11 percent. Nvidia dropped early on Friday but came back; however it was still down 6% for the week, and down 12% from it’s peak in October. Outside of the US, study of chip companies in South Korea and Taiwan are plummeting; the Korean SK-Hynix dropped 8%, and Taiwan Semiconductor Manufacturing Company dropped 4%. Three Japanese stocks dropped, with the Nikkei 225 index sliding 2 percent, Advantest(another semiconductor manufacturer) sank 12%, and SoftBank, a heavy AI investor fell 11%. In Europe it’s not been quite so bad, but the Stoxx Europe 600 ended falling 0.3%, and 1.2% in total for the week. Because of all of this, the CBOE Vix Volatility index (a popular measure of market volatility) is at it’s highest since April, when the trade war started.

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🔚 Outcome

If the market stays unstable and AI speculation continues, the bubble could pop and the market could crash. We’ve already seen stocks dropping, but not at a level where there is no return. However stocks aren’t the only thing being affected by the AI bubble.

⛱ Consumer Effect

Cryptocurrencies are also being heavily affected by the instability, with Coinbase and Bitcoin dropping 40 percent in the past month, and 2% on Friday respectively. (Coinbase did bump up slightly on Friday, but Bitcoin is down a third of it’s value since October, 10 percent since the start of the year, and continued it’s 11-day market slump.) And as crypto values drop, investors cannot withdraw their shares for the same amount, meaning they can put less into AI, and the stock market in general.

🏢Business Effect

While stocks are dropping, it’s not all bad. This past Thursday, NVIDIA announced large earning on Wednesday night, showing that AI chips are still in demand, and giving hope for investors. In addition, stocks did rise last Friday due to hopes of the Federal Reserve slashing interest rates in December. But neither of these were enough to keep the reservations held by many at bay, as several AI companies have taken debt to finance the heavy AI spending.

⏳ Final Summary

With stocks dropping, market instability at the highest it’s been since April, and uncertainty with regards to the government shutdown and the direction interest rates will go, the market will need to rebound in order to calm the economy. It’ll be interesting to see the way the market goes in the coming weeks, and specifically if AI makes gains, or the funding stops. But if anything major happens with the market, we’ll cover it, and tell you all you need to know.

🙏Thank You & Important Information

Thank you for reading this edition of Friday Finance. Consider sharing this article with friends or family if you enjoyed it, and consider subscribing if you’re not already. See you next week!

Best,

Grayson Stein and Jacob Gans

Friday Finance