In the latest MAI Market Update, John Zaller, Chief Investment Officer, and Tom Marra, Portfolio Manager, sat down to discuss artificial intelligence, which went “mainstream” in 2023. While AI has been attracting investment from venture capitalists and top technology firms for years, Microsoft’s major investment in OpenAI opened the floodgates for tech companies to announce their own AI strategies and investments. Following the markets rewarding any perceived beneficiaries of this emerging trend, John and Tom provided a high-level overview of AI and what it means for investors.
Artificial intelligence (AI) in this context refers to machine learning by training models on large sets of data and testing the model’s output given the parameters of that model. For example, if you want the model to generate an image of a dog, engineers train the model on a large data set of images of dogs. They then continuously adjust the parameters until the output is accurate. A well-known version of AI is ChatGPT, which is a large language model. It is trained on an extensive body of language and has 175 billion parameters, which gives a sense of how large the models are.
They believe there is enormous potential over time for these systems to increase productivity across industries as these tools are integrated into work functions. But as with any new technology, there are many complications.
They believe that the market has already figured out the potential to a certain extent, but there will continue to be ups and downs in investor sentiment. Right now, there is a great deal of enthusiasm. The iShares semiconductor ETF is up 47% year-to-date as of June 15, 2023, versus the S&P up 15% with some specific stocks up much more. This reflects what investors think will be increased investment in training models, and companies are trying to build up computing capacity ahead of that. They did note that, with every new technology that has benefitted semiconductors, demand has been cyclical – building capacity then digestion, which typically means slower demand. Right now, even with the excitement, not many people are making money on AI consumer-facing applications.
So far this year, the tech space has benefitted from AI enthusiasm. Given the weights of the large technology companies in the S&P 500, this has provided a big lift to the overall index. A well-diversified portfolio has exposure to these trends, and if we are right about the long-term productivity gains, many companies will benefit from efficiencies in place. But, right now, it is impossible to predict with the current set of information.
If you have any questions related to this topic or your portfolio in general, please do not hesitate to reach out to your wealth advisor at any time.
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