By François Rimeu, Senior Strategist, La Française AM

Is artificial intelligence a revolution?

The artificial intelligence revolution appears to be well underway, if the profits and forecasts released by Nvidia in May are anything to go by! A 25% rise in a single day for a company with a market capitalisation of over 700 billion is not an everyday occurrence, to say the least, and it made a very significant contribution to the widespread outperformance of technology stocks – once again – over the past month.

The rude health experienced by the biggest technology stocks has enabled US indexes to post positive performances this year, despite witnessing a negative performance at more than half of their listed companies. The difference in performance between the Russell 2000 and the Nasdaq, or between the S&P Equal Weight Index and the market-cap-weighted index, is a good illustration of the increased focus of indexes and, for investors of a certain age, a reminder of the excesses that emerged in the late 1990s. But can we really use the word excess nowadays, when these companies are posting extremely high margins and are emerging as the big winners of the last 20 years? Is Nvidia 's valuation out of line at multiplying its 2022 earnings by a factor of 131, or do these figures seem reasonable if we take into account that this ratio will be down to 36x in 2026 if the consensus among analysts becomes a reality?

Artificial intelligence could potentially have a substantial impact on society as a whole. Studies carried out in recent years show that some productivity gains and potential growth are there to be made:

- In 2017, McKinsey estimated that AI could potentially increase global GDP by 1.2% per year by 2030.
- In 2018, PwC published comparable estimates of around 1.3% per year.
- The OECD published a study in 2018 stating that by 2030 workplace productivity in developed countries could increase by 15 to 40%. In their 2017 study, Stanford researchers (Brynjolfsson and McAfee) came to similar conclusions, with an increase in productivity of 1.4% per year in very data-saturated sectors.

Lower inflation forecasts

In fact, it was an artificial intelligence system that helped me compile all these different studies! Although this gives us a sense of hope for the long-term outlook, amid all this excitement we must not ignore the various factors likely to influence the markets in the coming months.

The fall in commodities was once again one of the highlights of the past month, with the Bloomberg Commodity Index (BCOM Index) down 5.74% and some companies experiencing far more dramatic drops, particularly in the energy sector: -23% for 1-year European gas contracts and -8.45% for oil.

In addition to the uncertain economic outlook for the months ahead, linked to a persistently sharp contrast between soft data, most of which points to an upcoming recession (Sentix, NY Fed, etc), and highly resilient indicators on the real activity, the huge drop in commodity prices will have a direct impact on the next inflation figures and possibly also on core inflation figures if secondary effects start to be felt. To date, that has not been the case. Persistent wage pressures in the eurozone suggest it will take some time, but it is interesting that although the forecasts of several investment banks are very similar in terms of overall inflation, they differ significantly in terms of core inflation.

June outlook

The dichotomy between the manufacturing and service sectors remains very strong, as does that between "soft data" and "hard data", which will blur the picture over the next few months. In the medium term, however, we see the risks to activity as predominant: excess savings gradually drying up, tighter credit conditions, a negative fiscal impulse and a sluggish recovery in China. All these factors lead us to maintain low-risk portfolios.