Investors search for reasons why a
stock goes up or down in price. Often, the explanation is straightforward: Earnings are either good or bad. The business outlook for a company is either positive or negative. The
outlook is also important. When, as today, interest rates are high, some people will prefer the safety of investments in the
market or investment-grade bonds.
That said, uncertainty creates opportunities.
As an investor with over 40 years of experience, I believe there are tremendous opportunities in today’s market. Young investors with a long time horizon often choose to invest in S&P 500 index funds. They do so because, over the past 100 years, U.S. equities have generated average annual returns of almost
. Under the rule of 72, an investment with a 10% annual return will double in just over seven years. Compounding returns can generate wealth over time.
However, many other investors like myself choose to invest actively in individual stocks. And I believe the current market offers many apparently attractive opportunities. The obvious starting place is with stocks that are involved in the rollout of generative artificial intelligence. Two events illustrate how the market is rational and irrational. In February 2023, Microsoft reintroduced its Bing search engine with embedded ChatGPT. The market decided that Microsoft would be the winner in search and that the dominant incumbent search engine, Google Search, would lose market share. I thought the market was wrong. Humans don’t like change. I thought that Google Search would continue to be the dominant search engine. I was right.
Still, after the Microsoft launch of ChatGPT, its share price soared. The stock ran from around $250 to $350. And Alphabet-Google’s share price fell to around $90.
But search still matters. Today, Alphabet-Google is up almost 50% from its February lows. And Microsoft continues to trade at around $330. In the short term, the market can be and often is wrong. As fabled investor Peter Lynch said, “Invest in what you know and have confidence in your judgment.” I believe all of the largest technology companies will win in the AI revolution. They have the scale and balance sheets necessary to develop AI.
Of course, AI cannot exist without the semiconductors designed by companies such as Nvidia and fabricated by Taiwan Semiconductor. In addition, AI semiconductors cannot be fabricated without the equipment manufactured by the semiconductor capital equipment companies, including ASML, lithography equipment; Applied Materials, semiconductor manufacturing equipment; Lam Research, front-end semiconductor wafer processes; and KLA Corporation, process controls for the semiconductor manufacturing sector.
The individual investor must decide if AI is a technology bubble similar to the tech bubble of 2000. Or is AI the beginning of a new technology revolution that will jump-start productivity growth in the United States and around the globe? Goldman Sachs and the consulting firm
, among others, say AI can increase the productivity growth rate in the U.S. from the current moribund rate of maybe 1.5% to 2.5% or more. With annual productivity growth of 2.5% and an annual increase in the workforce of 0.5%, trend growth would be 3%, not 1.8%. U.S. GDP
would double every 24 years
, not every 38 years or so.
Increased wealth can solve a lot of problems, including climate change and cancer, and further reduce absolute poverty. I am all-in on AI.
Disclosure: The writer owns stocks in Nvidia, Alphabet, Microsoft, and ASML.
James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes
a daily note
on finance and the economy, politics, sociology, and criminal justice.