In this edition of Market Factors, I’ll detail an AI-related M.I.T. study with the potential to rock equity markets. The discussion will move to a solid argument for why markets have been able to sidestep political uncertainty and the diversion covers a disquieting new archeological find.
Dado Ruvic/Reuters
Equities
AI investment at risk
It is not a huge exaggeration to say that a recent M.I.T. study cited by CIBC World Markets analyst Stephanie Price has the potential to at least temporarily topple the markets.
The study underscored the difficulty in turning AI applications into productivity and profits and, with AI investment propping up not just markets but also the U.S. economy, a subsequent change in the rate of investment would have serious ramifications.
In a Thursday research report, Ms. Price recounted the details from the M.I.T.’s survey of 52 companies attempting to implement 300 different AI initiatives. The study found that 95 per cent of all AI initiatives failed to deliver significant return on investment. This was not from any aversion on the part of employees as it was also found that where companies provided access to ChatGPT-like tools, over 90 per cent of staff applied them.
It is AI-related capital expenditure that has pushed Nvidia Corp’s market capitalization to the largest in the world at US$4.3-trillion. AI expenditure is the reason Nvidia’s earnings growth forecast is an outsized 49 per cent for next year. A decline in investment as companies realize that AI will not help profit margins would push Nvidia’s stock price sharply lower and, because it’s the largest company in the market cap-weighted S&P 500, the benchmark would fall hard also.
Nvidia’s biggest customers – Microsoft Corp., Apple Inc., Alphabet Inc., Amazon.com and Meta Platforms Inc. – are the companies offering AI solutions after massive data center expansions. They are also the biggest companies in the world after Nvidia.
The potential effects of an AI investment slowdown on the stock values for this group of companies is not straightforward. The growth premium attributable to the dispersion of AI will decline, but they will also save umpteen billions in investment on data centers.
There are a host of companies making money from data centers – optical cable provider Corning Inc., semiconductor cooling specialist Vertiv Holdings, Advanced Micro Devices, technology-based REITs like Equinix Inc., just to name a few – that would suffer as investment falls.
AI investment is not just important for equity markets, it’s also holding up U.S. economic growth. As of early August, business spending on AI was contributing much more to GDP growth than consumers. More recently, California-Berkeley professor Brad De Long estimated that without AI spending, the U.S. economy was running very close to “stall speed”.
It is still early days for AI. It may turn out that the difficulties in implementing AI-related solutions in the workplace are only temporary. It is still the case, however, that investors should follow the trends on Ai investment closely, and expect extreme levels of market volatility if it stalls out.
U.S. President Donald Trump speaks during a “Make America Wealthy Again” trade announcement event in the Rose Garden at the White House on April 2, 2025 in Washington, DC. He touted the event as “Liberation Day”.Chip Somodevilla/Getty Images
Politics
Bad government policy doesn’t affect major players
Morgan Stanley strategist Ariana Salvatore published a compelling argument explaining why the equity markets are doing so well when political uncertainty is so high. In short, she believes that new legislation harms sectors that are too small to affect S&P 500 returns, and the sectors that are leading the market are boosted by new tax breaks.
Ms. Salvatore breaks new U.S. legislation into four categories – tariffs, taxes, immigration and de-regulation – that on balance present economic hurdles. Consumer discretionary stocks are most negatively affected while industrials continue to benefit from re-shoring incentives and the AI data center buildout.
Market uncertainty peaked on “Liberation Day” and is now fading. Investors focus on the second derivative of volatility – whether it is getting worse or better – rather than the actual level of current volatility. So even though uncertainty is still high, it is less of an obstacle for markets.
Of the major policy changes, Ms. Salvatore estimates that immigration limits and tariffs reduce economic growth by roughly 1.1 percentage points. Tax cuts will add an estimated 0.4 percentage points to GDP in 2026 and 0.2 percentage points in 2027. De-regulation benefits financials and energy but the strategist did not offer a forecast by how much.
Diversions
Signs of ‘intense torture’ in Neolithic humans
The debate regarding whether the human species is inherently evil or kind has being raging since at least biblical times. Cormac McCarthy, Pulitzer Prize winning author (whose relationship partner selection process was allegedly questionable at best) famously said that “the notion that the species can be improved in some way, that everyone could live in harmony, is a really dangerous idea… Your desire that it be that way will enslave you and make your life vacuous.”
This quote lives in my head rent-free. It comes to the forefront when I read about anthropological discoveries like that recently published in the Science Advances journal and summarized on the Ars Technica site.
Researchers in northern France found evidence of brutal clashes featuring limbs as war trophies, flensing, and cannibalism during the Neolithic period. The summary included the charming phrase, “marks on the remains are more consistent with intense torture and mutilation, per the authors.”
I am more optimistic than Mr. McCarthy was, or my portfolio would be loaded up with defence stocks. Anthropology sometimes makes this difficult to maintain.
The essentials
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Globe Investor highlights
Norman Rothery updates his ‘Screaming Value’ portfolio, which has returned nearly 16 per cent annually over the past 25 years
Jamie McGeever of Reuters asks: If America is in trouble, why do foreigners keep buying U.S. assets?
Jeff Sommer from the New York Times has some words of caution about the extreme stock concentration of U.S. markets right now
Billionaire investor Ken Fisher argues there’s no need to worry about an inflation reawakening
What’s up next
The data calendar is in back-to-school mode with potentially market moving reports surrounding the Labour Day weekend. Domestically, annualized GDP for the second quarter is forecast to show a decline of 0.3 per cent when released on Friday. On September 2nd we’ll get the S&P Global Canada manufacturing PMI for August.
Banks dominate the earnings calendar. Bank of Montreal ($2.948 per share expected) and Bank of Nova Scotia ($1.734) report Tuesday. Royal Bank ($3.321) and National Bank ($2.708) release results Wednesday along with Dollarama Inc. ($1.153). CIBC ($2.002) and TD Bank ($2.049) report Thursday and Alimentation Couche-Tard ($0.771) results are out on September 2.
The Americans will get annualized GDP results on Thursday when economists expect a 3.1 per cent quarter over quarter increase. Personal spending for July will be released Friday and a 0.5 per cent climb is forecast. The PCE price index, the Federal Reserve’s favoured inflation measure, is out the same day and 0.2 per cent month over month is expected for July. The ISM manufacturing results for August will be released next Tuesday.
The single most important release for global markets is Nvidia Corp. earnings ($1.008 per share expected) on Wednesday. Crowdstrike Holdings Inc. ($0.832) will be overshadowed on the same day. Dell Technologies Inc. ($2.295), a potential backdoor play on AI, will post profits on Thursday. Lululemon Athletica Inc. ($2.869) results are out Friday.
See our full earnings and economic calendar here