So far this year, Wall Street appears to be turning the corner toward a bull market. Each of the major market indexes has increased by 20% or more from their recent bottom, which some investors view as the main signal for a market change.
A big instigator of the current bullish atmosphere is new advancements in artificial intelligence (AI) and large language models, which led to significant advances in the field of generative AI. These advanced algorithms are generating impressive results, including passing some comprehensive and complex exams that only humans could pass previously. The AI systems can generate original text, artwork, and even music that many are surprised to learn is computer-created.
While business leaders and researchers continue to probe the many ways AI can leverage productivity, the rate of progress seen has captured the attention of some of Wall Street's best and brightest, who are investing notable amounts in hopes of cashing in on the potential of these AI-related companies.
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Who is Paul Tudor Jones?
Billionaire philanthropist Paul Tudor Jones heads Tudor Investment, the hedge fund he founded back in 1980. He has been called "one of the pioneers of the modern-day hedge fund industry." The noted investor cemented his place in Wall Street history when he predicted the Black Monday stock market crash of 1987.
In late 1986, Tudor Jones famously said, "There will be some type of a decline, without a question, in the next 10, 20 months," he said. "And it will be earthshaking; it will be saber-rattling."
Less than one year later, on Oct. 19, 1987, the market plunged more than 20% in a single day, marking the worst such decline since the market crash of 1929. Tudor Jones had shorted the market, resulting in a 200% gain for his hedge fund and its investors.
Another audacious call
Tudor Jones recently made a similarly bold call, this time regarding the overall impact of AI. While he admits to initially being skeptical, the significant adoption of ChatGPT and the capabilities of generative AI have made him a believer.
He said he expects these latest AI advancements to unleash a "productivity boom" that will ultimately decrease inflation and act as a catalyst for the stock market. "I do think the introduction of large language models [and] artificial intelligence, is going to create a productivity boom that we've only seen a few times in the last 75 years," Jones told reporters at CNBC.
He cited previous such catalysts, which include the vast U.S. infrastructure investments that were made in the 1950s, the widespread adoption of the personal computer in the 1980s, and the debut of the internet just a decade later. He told CNBC those previous catalysts were associated with productivity gains of 1% to 3%. He said he thinks this large language model (LLM) advancement could result in a productivity boom of 1.5% [annually] over the next 5 years.
He went on to point out that these previous "productivity miracles" boosted the stock market by 15% per year, on average. They also led to lower inflation and price-to-earnings ratio expansion in a range of 1.5 to 2. Such catalysts would provide plenty of fuel for a stock market rally.
What Tudor bought
Tudor Investments is known for its vast diversification, closing out the first quarter with more than 2,300 holdings in its portfolio. So it's notable that Tudor Jones recently increased his stake in Advanced Micro Devices (AMD 3.04%), also known as AMD, making it a top 15 holding. AMD is a rival to Nvidia in creating semiconductors designed for AI systems.
AMD recently unveiled its MI300X graphics processing unit (GPU), specifically designed for AI and data center applications. AMD CEO Lisa Su told investors that the ongoing AI boom is AMD's largest and most strategic long-term growth opportunity. She went on to say that the data center chip market is expected to grow from $30 billion in 2023 to over $150 billion by 2027, providing a large and growing opportunity for the company.
Furthermore, while the AI boom provided a tailwind for both companies, Nvidia is up roughly 186% so far in 2023, far outpacing the 70% gains for AMD. As a result of this disparity, AMD commands a more reasonable valuation, selling for just 6 times next year's sales, compared to a forward price-to-sales ratio of 19 for Nvidia. It's likely Tudor Investments was attracted by AMD's more compelling valuation and the potential to steal market share from Nvidia.
There could be much more to come
Tudor Jones isn't alone in his belief that AI could significantly boost productivity in the coming months and years, and the extent of those gains is still a mystery. Cathie Wood of Ark Investment Management is among the most bullish, suggesting the market for AI software could reach $14 trillion by 2030. More conservative estimates by Morgan Stanley and Goldman Sachs peg the opportunity at $6 trillion and $7 trillion, respectively.
In any case, it's clear that AI could have vast implications for the future. Investors would do well to find the best AI stocks they can find and hold on for the wild ride to come.
