Risk investor rally: Will AI hype lead to a stock market crash?

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Join the exclusive club of iPhone maker Apple, software developer Microsoft, or online seller Amazon in a few months? This is exactly what the chip maker Nvidia from California’s Silicon Valley has achieved. Only five companies worldwide have a market capitalization of more than one trillion dollars.

The new star in the sky of the American tech scene symbolizes the rally that has unfolded in world stock markets in recent weeks and months. Why: artificial intelligence (AI) applications are increasingly turning from abstract visions of the future into products for everyday use. Ever since the US company OpenAI introduced the chatbot ChatGPT to the public in November last year, it has not been possible to stop it.

One trillion calculations per second

Nvidia owes its rapid rise to the hype surrounding artificial intelligence. For machine learning to be possible, it first needs one thing: computers that can quickly process huge amounts of data.

For example, Nvidia is involved in the development of a supercomputer in Israel. The computer should one day reach an extra eight flops of computing power – that’s eight trillion calculations per second.

This is how the success of the Silicon Valley group is reflected in the quarterly figures. Nvidia last week reported revenue of $7.2 billion for the first quarter of 2023, significantly exceeding estimates of $6.5 billion.

The real surprise was the outlook for the second quarter, with Nvidia currently expecting $11 billion in sales, 50 percent more than analysts had anticipated. Shortly after the announcement, the stock rose by a quarter, and since a year its value has risen by 175 percent.

Attention «baby balloon»

In all the hustle and bustle of quantum leaps in artificial intelligence, the world’s eighth largest bank, Bank of America, is on the brakes. Top investment strategist Michael Hartnett recently warned of a “baby bubble” reminiscent of the inflated valuations of Internet stocks in the early 2000s before the dot-com bubble burst.

According to Hartnett, the ball is in the hands of the US Federal Reserve for such a scenario. For some time this has been raising the key interest rate regularly to rein in persistent inflation in the country. According to Hartnett, there is a particular risk if the Fed “wrongly” stops raising the prime rate.

Dividend securities for hedging purposes

The AI ​​boom in the stock markets can be traced back to the stocks of big tech companies. Mark Newton of financial advisory firm Fundstrat rated them as “absolutely overbought” compared to “CNBC” and predicted that the current stock rally will end soon. Meanwhile, most stocks in the S&P 500 are already stagnant.

For this reason, Swiss investors are advised not to keep their portfolios entirely up to the new hype. At “NZZ”, Alex Müller, Zuger Kantonalbank’s Chief Investment Officer, noted that investors with a dividend portfolio had already suffered small losses, around two percent, last year. This was compared to the 16 percent loss of the Swiss Performance Index (SPI). Shares of companies that regularly pay dividends were less volatile during uncertain times.

Source :Blick