For those of you who would prefer to listen:
The AI trade was back on to start this first full week of 2025. It didn’t last though. But the AI theme keeps gaining steam.
What’s being called the most transformational new technology that humanity has ever had in its grasp has been the major driver of the Stock Market. Artificial Intelligence is already impacting all things, economic, political, geopolitical, military, social and education. It’s that big. Advancements have been swift and mind-blowing. There’s also this: Rules and regulations are few and governments simply cannot keep up with the speed of innovation.
The world’s largest annual Tech expo, the Consumer Electronics Show, took place this week in Las Vegas. There were over 150K people in attendance. Artificial intelligence was everywhere. Over 4,500 exhibitors introduced products hoping to attract investor attention. On display were autonomous aircrafts and robots, AI wearable devices and AI farms. Also present were automated industrial products which use AI in home energy management systems. Of course, there were also TV’s and revolutionary home entertainment centers. But perhaps the most striking attendee was Aria, a blonde, female humanoid, which looks as humanlike as any robot and was able to answer questions. Some said she sounded a little inebriated, but that was likely the case for many of the human attendees. Remember, the event is held in Vegas. 2025 is setting up to be the year of the robot.
Nvidia Founder and CEO Jensen Huang kicked things off. He declared “the time for robotics and driverless vehicles is now, driven by AI”. Huang introduced what Nvidia calls Cosmos foundation models that generate photo-realistic video which can be used to train robots and self-driving cars at a much lower cost than using conventional data. These models are designed to help robots and cars understand the physical world similar to the way that large language models have helped chatbots generate responses in natural, human language.
Nvidia’s stock soared to start the week, taking the rest of Tech with it. But there was a sell-the-news event to follow, which dragged the major indexes lower the rest of the week. The Stock Market was closed Thursday and the Bond Market had an abbreviated session, in honor of Former President Carter. Friday brought more selling.
The AI-led rally has been all about innovation and the possibilities in 2023 and 2024. Things are moving just as fast in this next growth cycle while stocks have stalled. This next chapter is expected to center around integration and optimization. That was definitely on display at CES. Our sources believe this next stage of AI will be defined by real-world use cases that go beyond the hype. The massive investments should start delivering profits and productivity gains with more mainstream adoption.
Microsoft said it intends to spend another $80 Billion this year on the construction of data centers that can handle artificial intelligence workloads. This is a massive amount of money. The company said over half of that spending will take place in the U.S. “Today, the United States leads the global AI race thanks to the investment of private capital and innovations by American companies of all sizes, from dynamic start-ups to well-established enterprises,” Microsoft President Brad Smith said. It’s critically important that it stays that way.
China is starting to offer developing countries subsidized access to scarce chips, and it’s promising to build local AI data centers. The Chinese understand that if a country standardizes on China’s AI platform, it will likely continue to rely on that platform in the future. Microsoft’s Smith articulated: “The best response for the United States is not to complain about the competition but to ensure we win the race ahead. This will require that we move quickly and effectively to promote American AI as a superior alternative.” China’s leaders insist that Washington wants to stunt China’s technological growth to protect the US position as world No. 1. Of course, we can say with certainty that China would do the same thing.
Uber and Nvidia announced a collaboration to support the development of AI-powered autonomous driving technology. Uber rides represent a vast source of data that the 2 companies will look to build AI models more efficiently. Toyota will also be using Nvidia’s chips and operating system to power advanced driver assistance in several of its cars. Nvidia Drive Orin, the top car computer, enhances production with a reported 254 Trillion operations per second for safe, real-time driving decisions. I’m still trying to get my head around that.
Artificial General Intelligence, AGI, is what’s seemingly next. That’s defined as machines reaching human reasoning capabilities and surpassing human intelligence. Looking out further, OpenAI CEO Sam Altman discussed how his company is beginning to shift its focus to “superintelligence”. Altman believes that superintelligent tools could significantly accelerate scientific discovery and innovation. He also said that AI systems that can perform some tasks autonomously may join the workforce and meaningfully change the output of companies this very year.
AI has long been considered a threat to human jobs. The Bull case is that new jobs will come from the innovation. That’s certainly been the way throughout history. The Industrial Revolution brought heavy machinery to replace heavy labor with more cerebral work. People operated machinery. This Digital Revolution is going to be a big test. Humankind has never faced this type of revolution where machines are smarter than people. It’s happening, ready or not.
Speaking of Jobs, the December Job Report came in much stronger than expected. The unemployment rate ticked down to 4.1%. The Labor Market remains very solid which means that more rate cuts are becoming less likely. The Market doesn’t like that. Bond yields jumped. The Dollar and the price of Oil rose too. Stocks fell. The 10-Year Treasury yield kissed 4.8%. It’s a full percentage point higher than it was in October. It is now back to levels from October of 2023. Mortgages are back to 7%. Money is expensive again. All of this chokes off growth. Inflation is still a problem.
It wasn’t just the 10-Year that rose. Yields jumped throughout the curve. The 30-year Treasury hit 5%. Prior to 2023, it had not seen that level since 2007. Concerns over the Federal debt and debt ceiling are clearly at play right now. That, on top of the inflationary threats like higher tariffs and extended tax cuts. Excessive spending in Washington has long been a problem. Fears about a lack of Fiscal discipline are not restricted to the United States. Europe is facing it too. Borrowing costs in France are now above that of Greece. Let that sink in for a moment. In addition, yields in the U.K. have been pushed to their highest levels since 2008.
Importantly, all of this rate rising is happening while the Fed has been cutting rates. That’s the Bond Market sending a message. Investors are demanding larger premiums in response to these risks and uncertainties. Those Bond Vigilantes are saddling up again.
On the bright side, Adobe released its online shopping data for the 2024 Holiday Season. Consumers spent $241 Billion online which is a new record for e-commerce. Spending grew nearly 9% from 2023. Over half of the spending was driven by just 3 categories: Electronics, Apparel and Home goods. Other categories with notable growth included Grocery, Cosmetics, Sporting Goods and Toys. Also telling from the study: Holiday shoppers were more price sensitive. Strong discounts were flagged as a key driver. Further evidence of the healthy consumer appetite, both Costco and Delta reported strong results this week. In fact, Delta CEO Ed Bastian said 2025 could be the best year ever for the airline. He didn’t say anything about robots. Well, at least in public.
The Santa Rally failed to materialize this year. Stocksended mostly lower for December despite all the talk about favorable seasonality and post-election hype. The 4 consecutive daily decliners to end the year was the longest such stretch since 1968. Carrying over into the new year, selling has been a theme to start 2025.
Back to robots:
Morgan Stanley estimates the humanoid robot population will reach 40,000 by 2030. It is then expected to explode to 63 Million by 2050. That might even be low. Elon Musk said there will be 10 Billion. It’s been reported that Amazon, Apple, Nvidia, Google and Tesla are all working on humanoids of their own. They’re definitely not alone. Whatever the number ultimately is, the 2030s are set up to be a pivotal decade for the Digital Age. And 2025 looks like a launching pad.
This is an exciting time to be an investor, with the most dynamic innovative digital revolution in our lifetime. This, on the back of the American Economy which time and again proves its strength and resiliency.
But none of it comes without risks, which are many, presently. We also must remind ourselves that stocks don’t fly forever. We expect some more turbulence ahead as 2025 continues to take hold. We’ve been ready.
Our thoughts continue to be with our clients, friends and family in Southern California who are experiencing such a horrific event. Bedell Frazier is providing much needed supplies through the Red Cross to fire victims in need. We pray for reduced winds and red flag warning removals while first responders continue to demonstrate what real American heroes do.
Have a nice weekend. We’ll be back, dark and early on Monday.
Mike
