The ChatGPT Revolution
Innovation on Wall Street often translates to earnings growth and subsequently higher equity prices. Back in late 2022, OpenAI, backed by tech giant Microsoft, set off the Artificial Intelligence (AI) revolution with its groundbreaking release of the chatbot ChatGPT. This chatbot, powered by a large language model, offered users instantaneous answers to a myriad of questions, marking a significant milestone by swiftly amassing 100 million users. Despite the longstanding presence of AI, ChatGPT emerged as a pivotal proof of concept, propelling tech rivals like Alphabet to jump into the AI arena in a bid to capitalize on the trend.
The Ebbing Tide of AI Juggernauts
The past year has ushered in a bullish run for investors, characterized by soaring equities and record highs, robust earnings, and broad-based market participation. As is typical in bull markets, the industries experiencing the most significant growth become the trailblazers. In the current landscape, AI-related stocks have taken the lead. Notably, Tesla CEO Elon Musk hailed AI as the fastest evolving technology he has encountered, a sentiment shared by many seasoned market observers who have marveled at the unprecedented earnings escalation.
Image Source: Zacks Investment Research
A Bright Outlook for AI Investors
Despite recent retreats in AI-linked companies like Nvidia, Super Micro Computer, and Arm Holdings due to inflation concerns rattling U.S. markets following an unexpectedly high CPI reading, the risk/reward profile remains inviting for intermediate to long-term investors.
Institutional Support via Moving Averages
Historically, institutional investors defend the 10-week moving average during bull markets, offering an attractive risk-to-reward ratio. Notably, stocks such as Nvidia, which surged from $500 to nearly $1,000 earlier, are now retracing uniformly towards their respective 10-week moving averages.
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Sustained Earnings Growth Trajectory
The race for AI supremacy is intensifying, with several AI-related entities showing accelerating earnings growth. Projections from Zacks Consensus Estimates indicate Super Micro Computer is poised for triple-digit quarterly earnings growth in the upcoming two quarters, a remarkable feat for a $50 billion enterprise.
Image Source: Zacks Investment Research
Steady Correction Signals
Noteworthy is the manner of correction – through time, not price – within the AI sector. The absence of significant selling post substantial gains signals bullish sentiment, as exemplified by Arm Holdings, which surged by 62% following robust earnings before maintaining its earnings-induced gains, a display of entrenched bullish control.
Image Source: TradingView
The Verdict
In times of market turmoil, amateur investors often yearn for price pullbacks but shy away when they manifest. Nevertheless, the current dip in AI stocks presents a promising reward-to-risk opportunity for astute investors to exploit.
