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Friday Olympian charts

The Paris Olympics start today, but the AI Olympics have been in full-swing all week.

Meta, Alphabet, OpenAI and NVIDIA all announced podium-worthy advances in artificial intelligence this week — in one case, literally: Google DeepMind’s AI model took the silver medal in the International Math Olympiad that just ended.

Most impressively, the silver-medal winner trained itself: "This type of AI learns by itself and can scale indefinitely," an Google executive explained.

Wow.

Not to be outdone, Mark Zuckerberg announced the release of Llama 3.1, an open-source model that’s probably just as capable as Google’s silver-medal winner, but available to all — for free.

Also, OpenAI announced it’s working on a Google-killer, SearchGPT (ChatGPT, but without all the hallucinating).

And NVIDIA announced two "small language models" that are 90% cheaper to run than the large language models we’ve all been underpaying for (OpenAI is reportedly on pace to lose $5 billion this year).

Collectively, this is the industry’s answer to shareholders’ growing concern about the staggering amount of money they’re spending on AI: Full-steam ahead!

Alphabet CEO Sundar Pichai confessed as much when he said this week that "the risk of underinvesting [in AI] is dramatically greater than the risk of overinvesting." 

This is exactly what has the market concerned: When no one company can afford to be outspent, it’s a virtual guarantee that they will collectively overspend, probably by a wise margin and often with disastrous consequences (see: dotcom crash).

This fear has been percolating for weeks and it’s now become consensus enough to have a name — "AI capex overspend."

That’s probably a good sign — recognizing your fears is the first step to overcoming them — and it’s not the only hopeful thing.

Shares of ServiceNow shot higher this week after reporting revenue up 22%, largely thanks to the AI-powered software solutions it provides; companies like Axon are finding applications for AI that genuinely make the world a better place; and lots more is quietly happening in unglamorous areas like insurance, call centers and government agencies.

Will it be enough for mega cap shareholders to make a return on the hundreds of billions of dollars being spent on capex?

Robert Solow’s famous dismissal of the hype around personal computers — that he could "see the computer age everywhere but in the productivity statistics" — seems equally applicable to the AI hype of today.

But Solow said that in 1993, not long before the greatest stock market run ever, and computers really did go on to change the world. 

With the world’s largest companies all full-steam ahead, AI seems poised to do the same.

Should investors hang on for the ride?

Let’s check the charts. 

Revenge of the nerds, week 3:

With the Magnificent 7 (in purple) giving back 19 percentage points of YTD performance, US small caps (orange) have nearly caught up with the Nasdaq 100 (blue). 

Unprecedented:

A staggering collapse in the correlation between the market-cap weighted and equal-weighted S&P indexes is a measure of how unprecedented the rotation out of mega-cap and into small-cap has been.

Still growing:

Q2 US GDP was reported yesterday at 2.8%, miles ahead of the 2.1% consensus. The Atlanta Fed’s first cut at Q3 GDP is also 2.8% — and also miles ahead of consensus.

Still disinflating: 

The FOMC’s preferred measure of inflation continues to go in the right direction with core PCE up just 2.6% in June versus a year earlier. Two-year Treasury yields fell to a six-month low in response.

Wage growth is real:

At 3.9%, wages continue to grow well in excess of inflation. 

Cooling off:

A Wall Street Journal headline this week declared that "the hottest job market in a generation is over." If 4% unemployment is the demarcation between hot and not hot, the current run of job growth has fallen just short of the 1950s and 1960s for best-ever time to get a job.

Deflating profits:

Ford reported a big loss in their electric-vehicles segment this week, citing wholesale EV prices down 23% (!) for the year. Overall, US car and truck prices fell another 0.75% just last week.

Not deflating:

US home prices hit a record high in June — you now need a $426,900 home just to feel average.

It’s not always this easy:

Before this week, the S&P 500 had gone 356 sessions — nearly a year and a half! — without a 2% down day.

Accelerating worries over "AI capex overspend" have broken that long run of placid markets, so there are probably more such down days to come.

But let’s not doubt AI’s ability to accelerate progress, too.

Have a great weekend, medal-winning readers.

— Byron Gilliam

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