Public markets: The S&P 500 rose by 8.3% quarter-over-quarter, while the NASDAQ composite increased by 12.8%. Two main factors contributed to this performance: investors are looking beyond 2023 and focusing on 2024-25, anticipating a reversal in the Fed‘s rate hikes. Secondly, large-cap technology stocks have outperformed, particularly NVIDIA with a year-to-date gain of 196%.

AI driving the market: The growing acceptance of AI technology by businesses, governments, and consumers has had various effects on the market. Firstly, AI is expanding the total addressable market for technology businesses, which, all else being equal, increases valuation multiples on tech stocks. Secondly, AI is expected to be disinflationary and improve societal efficiency in the long run, leading to lower average inflation. Consequently, lower long-term inflation allows the Fed more flexibility to keep the federal funds rate lower, thereby boosting equity valuations.

How the market is playing AI: In public markets, investing in NVIDIA is one of the primary ways to gain exposure to AI. The AI ecosystem consists of several layers, including chips to run the data (where NVIDIA holds a dominant market share), data for AI training (owned by major cloud providers like Microsoft, Google, Amazon, Tesla, etc.), AI training algorithms (developed by startups such as OpenAI, Anthropic, Cohere, Stability AI, Inflection, Runway, X.ai), and software for consumer and organizational use cases (where entrepreneurs are currently building startups). While many market participants lack access to private market opportunities, they have invested in available public stocks like NVIDIA, Microsoft, Google, and Amazon – which collectively contributed to lifting the entire stock market.

AI vs. the Fed: It appears that AI has exerted a stronger upward pull on the stock market compared to the downward push by the Fed’s actions.