What happened
Shares of artificial intelligence beneficiaries Alphabet (GOOG 9.96%) (GOOGL 10.22%), C3.ai (AI 3.02%), and MongoDB (MDB 4.83%) were all rallying on Tuesday, up 2.7%, 5.8%, and 3.5%, respectively, as of 2:57 p.m. ET.
Today, Alphabet held its Google Cloud Next conference, and announced several new AI features and partnerships.
However, Alphabet and the other two stocks were likely helped even more by new macroeconomic data. This morning, the July JOLTS data came in softer than expected, boosting hopes the Federal Reserve might be done hiking interest rates without having caused a recession.
Thus, interest-rate-sensitive stocks, such as these tech growth stocks, rebounded strongly after their early August swoon.
So what
Each of these three stocks had risen this year through July, having been identified as a potential artificial intelligence (AI) beneficiaries.
Alphabet is known as an AI pioneer with huge financial resources, a digital ad empire likely to benefit from improved targeting, and its own cloud platform through which it can sell AI capabilities to other companies. C3.ai builds company- and industry-specific software products with individual companies' own data, and MongoDB is a modern, flexible database alternative to the traditional row-and-column format, and should also benefit from the huge data requirements of AI applications.
Yet all three tech stocks pulled back in the first part of August, as rising long-term bond yields and fears of persistent inflation sent growth stocks into a pullback. The higher the long-term yield on U.S. Treasury Bonds are, the more investors will typically discount future earnings, making those earnings worth less in present-day terms.
But today's Job Openings and Labor Turnover Survey (JOLTS) showed a large decline in job openings during July. Openings fell by 338,000 to 8.8 million, while the June data was revised down significantly, from 9.56 million to 9.17 million. This was actually a welcome sign, as job openings continue to outpace the number of unemployed people. The tight labor market has been identified as a key reason behind current inflation, so lower openings show the Fed's interest rate hikes are working, and that inflation is likely to fall.
Of course, the flip side is that job openings could fall too far, unemployment could rise, and we could have a recession. Yet investment in artificial intelligence and using data to increase productivity is likely to continue. Therefore, if interest rates come down with only mild effects on these three companies' growth prospects, that would be beneficial for their stocks.
Artificial intelligence stocks rallied today. Image source: Getty Images.
Also on Tuesday, Alphabet held its Google Cloud Next Conference. Investors should look out for Google Cloud to become a more important part of the Alphabet story, as the unit has continued with solid growth this year and even flipped to profitability two quarters ago.
Amid concerns over competitive intensity and monetization of AI, two important announcements stood out. First, Google's new in-house designed Tensor Processing Unit (TPU) specs were unveiled, displaying up to twice the performance for AI training over the prior generation, and even higher performance per dollar when using large language models. Google's TPUs could be a nice alternative for companies looking for lower-cost alternatives to Nvidia's leading H100 chips, although Alphabet also noted its H100 supercomputer instances would be available on Google Cloud next month.
In addition, Google announced AI for corporate Gmail accounts would cost $30 per person per month, which may lend more optimism over the company's future financial benefit from AI. Of note, last month, Microsoft announced the AI features for its Office suite would also cost $30 per month.
Between the exciting and fast-moving innovation in AI and the prospect of no more interest rate hikes, Alphabet and other AI growth stocks were largely surging higher on Tuesday.
Now what
Before investors get too carried away with today's euphoric bounce, a few words of caution. The JOLTS data shows a weakening jobs market. While this was welcome given the state of inflation, it's possible the pendulum might swing too far the other way, leading to a weaker overall economy. That could put pressure even on AI-related companies, especially if they are more speculative, such as C3.ai, which hasn't yet translated its AI hype into tangible growth and profits yet.
Furthermore, as the AI wars progress, investors will be able to better distinguish winners from pretenders. So while today saw broad-based strength, the winners and losers from AI disruption will likely reveal themselves more as more time goes on. So, investors should be much choosier when selecting AI stocks for their portfolio as the economy weakens.
