The ripple effects of AI splurging
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What market moodiness is AI causing in financial markets?
AI-driven moodiness on financial markets. I'm David Brancaccio in Los Angeles. Monday, the stock market consensus was that artificial intelligence will ruin swaths of the economy, and we got a big sell-off. Then came Tuesday, where a $100 billion MetaFacebook deal to buy AI chips from advanced micro-devices drove a wave of tech optimism that boosted the Nasdaq here 1% and Japan's Nikkei Index 1%. Good morning. Can I say it this way? What is with you people? I mean, it turns on a dime these days.
That's fair. That's fair. That's because it's such an unknown. We just have no idea how soon companies are going to realize operating profitability, operating improvements from this AI investment. These are big numbers. Investors just can't figure out what to make with it.
I mean, yesterday was guided by huge meta, Facebook, Instagram, etc., doing a huge deal to buy AI chips from advanced micro devices. But today we get the other big AI chip makers results. It'll be late in the day after the market closes. That famous company, NVIDIA.
NVIDIA has been very good at under-promising and over-delivering on recent quarters. It really is price for perfection. So investors have expected the best to happen. They're going to see a very strong guide. They want management to talk about how good things are for the future. If NVIDIA misses estimates or talks about margin pressure, I think investors have the potential to get very nervous and we could see another swing in AI stocks tomorrow.
All right. And for the rest of us, margin pressure, what's that?
Margin pressure means that operating profitability comes down rather than expands. For NVIDIA, who's making the chips, the more chips they make, presumably, the more profit and the better scale they should have, so the higher profit margins.
Susan Schmidt is at Exchange Capital Resources. Yesterday on Marketplace's half-hour program, my colleague Kai Risdahl spoke to Atlanta Fed President Rafael Bostic, who steps down at the end of this week. inflation and the labor market were part of that, but also those two syllables, AI. Here's Bostic.
There are lots of reports, and you all have done a number of these as well, to suggest that these new technologies are going to change the way that businesses think about how many people they need to produce the goods that they want to produce. That could be a structural change. If that winds up being true and it winds up penetrating through the entire economy, all of our benchmarks are going to have to change, like how we think about what a good jobs number is or what an unemployment rate that's reasonable should be, because the same number is sending a very different signal.
$50 billion a month. That's how much Moody's expects companies to spend on average to build data centers over the next few years to pay for all that construction. Morgan Stanley expects companies to sell a record amount of investment-grade corporate bonds this year. As Marketplace's Justin Ho reports, all of that new debt could have some side effects.
Corporate bonds are generally viewed as riskier than government bonds, so they tend to pay higher yields.
How much are companies expected to invest in AI data centers?
But when it comes to big tech companies, investors don't see that much more risk. So when it comes to the interest on their bonds?
You're not getting a lot of additional compensation to own some of this debt versus just owning treasury securities.
That's Lawrence Gillum at LPL Financial. He says the rates big tech companies pay could always go up. For instance, if a big wave of new corporate bonds floods the market, supply might outweigh demand.
That means, in theory, that you could see higher yields with this amount of issuance coming to market to attract additional demand.
In other words, pay more interest to attract more investment. And if that happens, investors who'd otherwise pour money into the safety of government bonds could be persuaded to throw some money at the corporate sector.
You can think about, to some extent, the corporates being substitutes for treasuries, especially those that have a very high quality.
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