Whistling Past The Debt-Ceiling Crisis

All week, the headlines have had you wondering if we might be on the verge of a full-blown debt-ceiling crisis. But if you’ve been watching the markets closely, you might be wondering whether AI is putting us on the verge of something else.

🕰 Recap

• The debt-ceiling deliberations in Washington have set nerves on edge. And with just a handful of days left to deadline day, the clock is ticking loudly in investors’ ears.
• Some sort of resolution is overwhelmingly likely, but a no-deal outcome is unthinkably dangerous. So expect it to dominate the headlines for a few days.
• But it’s not all nail-biting issues. Nvidia and its artificial intelligence (AI) technology friends are driving the market higher. And the firm’s latest success has imaginations running wild.

✍️ Connecting The Dots

The market’s been keeping one eye on the debt-ceiling debate for a while now, but with just days until the US faces the real possibility of a government default, the stakes are climbing by the hour. Every time the market gets news from Washington – whether it’s signs of progress or more discord – volatility shoots high enough to register on the Richter scale. But these US debt-ceiling crises aren’t exactly new – the limit’s been raised something like 90 times since it was first set in 1917 – with lawmakers reaching a resolution every time. Investors should expect an uneasy few days, but the overwhelmingly likely outcome is a deal of some sort.

So you should just probably hold your breath for a few days and then perhaps it’ll be time to move onto the other big theme du jour: AI. It’s been just six months since ChatGPT was unleashed, but the world already feels like a different place. AI leaders – like Nvidia and Microsoft – are feeling an immediate benefit, in both their financial performance and their stock prices. But strip out these big AI-driven tech firms and the rest of the S&P 500 is still flagging. And that leads to the big (and arguably most important) question of how AI might change regular firms. Investment bank Goldman Sachs estimates that it’ll inflate the S&P 500’s profit margins by 30% over the next ten years. Thanks for that, Goldman, but which firms will benefit the most?

It’s a tough one to answer and it’ll take time for the non-tech winners to rise to the surface. But that means you’ll have time to go looking for some answers. And you might start by thinking about the firms that were early to get their arms around past themes, like online selling, or cloud-based infrastructure. Often it’s a forward-thinking management team or an ingrained experimental culture of an organization that makes the difference. Those are the “softer” parts of fundamental analysis, but because they’re less technical, they can be easier for non-professional investors to nail. You can check out annual reports for discussions on cultures and even go back in time to the early days of cloud technology (2013-15) to see what management teams were saying. There’s no substitute for hard work in investing, but it’s fun, right?

🥡 Takeaways

1. Some things get bubbly.

For anyone who remembers past tech frenzies – 2021 being the most recent, of course – the current AI excitement does feel a bit like a bubble. But take a step back and you’ll see a key difference. In previous tech bubbles, many firms – whether directly or just loosely connected – saw their stock prices soar. In 1999, any firm with a website saw its stock price rip. In 2021, dozens of “pandemic winners” skyrocketed. But the AI mania, by contrast, seems contained to just a handful of firms. And that’s probably good news. See, had the AI theme infiltrated the stock prices of non-tech firms en masse we’d probably be able to call a bubble. But that hasn’t happened, yet.

2. And some things deflate.

Inflation has been dominating the headlines for over a year now, and it seems to be the consensus view that it’s going to be with us for a while. But maybe not, and, yes, the reason comes back to that AI theme. One thing most experts seem to agree on is that AI will lead to massive cost savings for most firms – in other words, a huge deflationary force. And that’s not a purely speculative thought either: we've seen this happen before. In the years after the financial crisis in 2008-09, interest rates were ultralow and borrowing money was a breeze too. That’s supposed to be inflationary, but inflation actually trended lower for more than ten years. And perhaps the reason for that was the vast amount of technology adoption on cost-saving and productivity-inducing cloud computing. Now, inflation did eventually emerge, of course, but there’s a decent chance that it was driven by shorter-term things like supply constraints and war-induced commodity cost increases. So if AI gets its tentacles in all industries, it's conceivable that it could unleash another massive deflationary wave.

🎯 Also On Our Radar

Germany is officially the first major economy to confirm it’s actually having a recession. And given all the recession chat recently, you’d think that’d be all-encompassing bad news. But take a look at the country’s leading share price index, the DAX. It recently hit an all-time high, showing that stock markets and economies don’t always dance in sync.