The S&P 500 has gained roughly 14% so far in 2023, in stark contrast to its 19% decline last year. Furthermore, each of the major market indexes has rallied more than 20% from their respective bottoms, signaling the next bull market, at least as defined by some experts.
Helping fuel the market's current surge is excitement about recent advances in artificial intelligence (AI), including the large language models and generative AI that produced ChatGPT. The next-generation chatbot took the world by storm, adding more than 100 million users in its first two months of availability -- making it the fastest-growing consumer app in history.
Yet the excitement regarding AI is being countered by concerns about a potential recession. As recently as April, economists at the Federal Reserve Bank predicted a "mild" recession was likely this year. This prognostication has some investors sitting out the current stock market rally.
So whose views hold the most weight? And what's an investor to do with these oppositional views? One Wall Street legend seems to think investors and market traders are missing the forest for the trees.
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Steve Cohen has navigated market changes for decades
Billionaire Steve Cohen made his mark on the hedge fund industry when he founded the now-defunct SAC Capital Advisors (his initials are SAC) and managed to grow $25 million in initial investments into one of the biggest hedge funds ever (at the time). He rose to prominence by successfully betting big on technology stocks during the late 1990s. He subsequently generated major profits by shorting those same stocks when the dot-com bubble burst in 2000.
Cohen later founded Point72 Asset Management, which has more than $27 billion in assets under management. In 2022's bear market, Cohen generated a 10.3% gain and profits of $2.4 billion even as his hedge fund peers endured declines. Cohen is also the majority owner of the New York Mets.
Missing the forest for the trees
Cohen says investors right now are missing out on a "big wave" of opportunities resulting from AI, focusing too much on a potential market downturn. "I'm making a prognostication -- we're going up," he recently told attendees at an industry conference. "I'm actually pretty bullish."
Contrary to some investors who fear AI will threaten or replace jobs, Cohen said he believes AI will, in the aggregate, likely create jobs. He admits harboring concerns about the "types of jobs that will be displaced" but overall expects advances in the technology to improve profit margins and curb the Fed's interest rate hikes, which will -- in turn -- fuel an ongoing stock market rally.
What Cohen just bought
Point72 recently increased its already sizable stake in Alphabet (GOOGL 0.66%) (GOOG 0.56%). The hedge fund added more than 2 million Class A shares to its holding in the first quarter, bringing the total stake to more than 3.3 million shares, valued at more than $393 million.
Alphabet recently came out swinging after pundits suggested the company had surrendered its AI lead to Microsoft, which invested $13 billion in ChatGPT creator OpenAI. The Google parent dispelled that notion when it announced a laundry list of new AI-powered products as features at its 2023 I/O developer conference.
While AI was clearly an attractive selling point, there were plenty of reasons that likely played into Cohen's investment. Alphabet has a long track record of deploying AI to fuel its industry-leading search, which controls roughly 93% of the worldwide search market. This, in turn, acts as a funnel for Google's leading digital advertising businesses, which control about 30% of online advertising worldwide. There's also Google Cloud, the company's top-tier cloud infrastructure service, which is the fastest growing of the big three (which includes Amazon Web Services (AWS) and Microsoft Azure).
Cohen also initiated a new position in Nvidia (NVDA -3.89%), which single-handedly revolutionized the AI industry. The company developed the specialized semiconductors that made possible the recent advancements in AI. Point72 bought just short of 1 million shares of Nvidia stock in the first quarter, currently valued at more than $407 million.
Nvidia's management was able to reverse a stock price slump this year when it revealed a stunning rebound. For its fiscal 2024 second quarter (which ends July 31), Nvidia is guiding for revenue of $11 billion, an increase of 64% year over year and 53% sequentially. It should come as no surprise that soaring demand for the processors used for AI was behind its bullish forecast.
Cohen isn't alone
Cohen isn't the only one who thinks AI will not only drive innovation but could fuel an ongoing stock market rally. Paul Tudor Jones, founder of hedge fund Tudor Investment, said he believes AI could spark a "productivity boom," which could fuel market gains of 15% annually for the next five years. Cathie Wood of Ark Investment Management is similarly bullish, suggesting the total addressable market for AI software could realistically hit $14 trillion by 2030, but could go much higher.
While I have no idea what will happen in the coming weeks and months, I have no doubt the stock market will gain over the longer term -- and AI will help fuel that rally.
Whatever the case, there's a consensus emerging among the world's top investors that AI is the wave of the future. Investors should plan their stock purchases accordingly.
