US stock market: Why Wall St is betting trillions on AI as Middle East burns

Wall Street investors’ bets on the potential of artificial intelligence sent US stock markets to records on Friday, ignoring inflation and Middle East oil shortages.

The Nasdaq rose 1.8 per cent to a record 24,836 points and the S&P/500 rose 0.8 per cent to record 7165 points to complete its fourth-straight weekly advance.

At the heart of last week’s buying were computer chip, or semiconductor, manufacturers.

As an example, the Philadelphia Stock Exchange Semiconductor Index has risen 18 straight trading days. The exchange-traded fund (ETF) owns the 30 largest US-traded companies involved in the manufacture and sale of semiconductors required to power the AI revolution.

The market’s performance indicate investors are ignoring the Middle East for an AI windfall that could be worth trillions.

The flagship business among them is Nvidia. The world’s most valuable company reached a record value of $US5.06 trillion ($7.08 trillion) on Friday.

In the last three months of December, Nvidia grew sales to $US68.1 billion, up 73 per cent from the period a year earlier.

This growth rate to sales of $US5.2 billion ($7 billion) — every week — is abnormal and unprecedented.

It shows anyone all they need to know about why AI is capturing all the capital central banks have injected into markets since the COVID-19 pandemic between 2020 and 2022.

Warren Buffett’s metric

The world is awash with money and a lot of is being funnelled into AI businesses on Wall Street.

One of the best financial indicators to understand this and AI’s role in the future of stock market swings is favoured by Warren Buffett.

Known as the “Buffett Indicator”, it measures the value of the top 500 stocks in the S&P/500 divided by the US gross domestic product (GDP).

If the total value of stocks is far higher than GDP when expressed as a percentage, it suggests the market is overvalued, or that there’s simply more money in the world chasing the same 500 stocks.

According to MacroMicro.me, the Buffett Indicator sits at a record high of 228 per cent today. Buffett himself said a range of 75 per cent to 90 per cent is fair value, but over 120 per cent means stocks are overvalued.

This is because it’s mathematically impossible for economic output — measured by GDP — to keep up with the profit growth priced into stock valuations.

Unless GDP growth suddenly soars at an exceptional and dramatic rate.

To an extent, today’s stock buyers are betting productivity gains from AI can suddenly accelerate GDP growth.

That’s why the AI trade is so popular. And also why it’s divorced from the real world’s economic disaster of the Middle East war, inflation and fuel shortages.

But the Buffett Indicator’s historic move higher from 90 per cent during the GFC in 2009, to 228 per cent today, also shows central bank money printing has forced stocks’ valuations higher, regardless of the real economy. Arguably, Wall Street’s record highs are more because money — printed by central banks — is losing value, rather than because rising profits are boosting companies’ values.

Never could that be clearer than in today’s markets, with US stocks at record highs, despite a catastrophic inflation shock from the Middle East.

Outside Wall Street, markets such as Australia have little direct exposure to AI demand other than in data centre businesses such as NextDC and Macquarie Technologies. The ASX has also seen lots of companies warn of the real world damage to the economy such as Qantas, Virgin Australia, Westpac, and NAB. This divide between Wall Street and the S&P/ASX 200 is unlikely to change much, even with two AI-linked businesses in Firmus and SharonAI tipped to list on the the local market later this year.