Looking back, 2023 has been the year of AI. The subject has certainly received a lot of attention from analysts and the financial media, and even from mainstream news outlets. I can’t find reliable data on the subject yet, but I don’t think many would disagree with me when I say that it certainly feels like AI has come second only to the Fed in terms of the number of times it has been talked about and the influence it is believed to have had on the markets. It has been the buzzword of the year in business circles, at least.
The thing is, though, its real impact on individual stocks has been limited. So far, the biggest beneficiaries have been Nvidia (NVDA) and Microsoft (MSFT), mainly because they are just about the only publicly traded companies that have been able to monetize the technology effectively. Nvidia supplies the chips needed to develop AI capability, and Microsoft, through their association with OpenAI, a user-friendly end product, the much-talked about ChatGPT. In 2024, though, that two-company dominance will probably change.
Many other firms, from big boys like Alphabet (GOOG, GOOGL), Meta (META), and Amazon (AMZN) to a whole host of not yet publicly traded startups and growth companies have developed platforms and products that use generative AI. That makes it likely that, as Goldman Sachs (GS) said in a recent research piece, “AI (is) poised to begin shifting from ‘excitement’ to ‘deployment’ in 2024.” That will no doubt create opportunities in the obvious places, like chip suppliers and software companies, but picking stocks in those areas is fraught with danger given the early adopter advantages that are already accruing to MSFT and NVDA. Someone will probably have emerged as a major rival to those two by this time next year, but at this point it is anyone’s guess who that might turn out to be.
However, if 2024 is the “year of deployment,” and should AI technology come anywhere close to fulfilling its potential, there will be an impact that will benefit every investor: improved productivity.
In another Goldman article on the subject, the bank estimates that AI could raise global GDP by 7%. That boost will come not from more workers, but from increased productivity, and that is important for all investors because it gives a way out of what might be untenable stock prices and valuations going into 2024.
It could be argued, of course, that valuations really aren’t that excessive. The S&P 500 is currently trading at a trailing P/E of 26.12, which is above the long-term average of 23.73, but not worryingly higher. These, however, are not normal circumstances. Inflation, while moderating from the highs, is still running at around double the Fed’s stated target rate, and they have repeatedly said that they will continue to prioritize the fight against higher prices next year. The market, even so, has spent Q4 betting on lower interest rates in the spring.
For it to happen, though, inflation will have to fall quickly, bringing the danger that in pursuit of that the Fed either overdoes it or already has squeezed too hard, in which case we will see a recession in early 2024. There is, however, a way in which inflation could fall without the kind of GDP contraction that would cause that. The best, most sustainable way to beat inflation is with increased productivity. Greater output per work hour increases profits for corporations, reducing the need for price hikes.
In addition, more productive workers typically get paid more, stimulating growth. All of that creates a situation where inflation falls, but in an environment of quite strong economic expansion: the so-called Goldilocks scenario. If we see that early next year, stocks actually look reasonable, maybe even cheap, at current levels.
So rather than looking for individual companies that will benefit from the deployment of AI, investors should look for sectors and industries that will derive the biggest advantages from increased productivity. That brings in some areas of the economy that are far from obvious beneficiaries from the AI revolution. Healthcare providers, for example, where generative AI can make for faster, more accurate diagnosis and treatment selection. Even industrials, usually seen as a sector that is negatively correlated with technology, can become more efficient with effective analysis of processes and logistics.
After a lot of attention on AI this year that, quite frankly, has often been more hype and bluster than anything, 2024 is shaping up to be the year when the impact of the technology will be felt beyond NVDA and MSFT. Those two stocks will no doubt do well and owning them is certainly a good idea, but if the impact generative AI spreads as expected next year, there will be plenty of opportunities elsewhere and investors should look beyond the obvious to maximize returns.
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