It was an exceptionally busy week as earnings announcements took center stage. Some of the largest companies across a wide variety of sectors and industries reported and one thing became abundantly clear – there is no trend or pattern evident. Some companies beat revenue expectations only to miss on the bottom line. Other companies missed revenue expectations but through some excellent financial engineering managed to beat on the earnings front. And yet others met expectations but lowered forward guidance which met the ire of investors. The only thing we’re not hearing on the various conference calls is that the future looks bright. The takeaway this earnings season (so far) is that companies are cutting back spending, freezing hiring, and in some cases laying off workers. They all appear to be working off of the same playbook which indicates the slowing economy is going to be an issue for many of them later this year.
When we look at the economic data, we see a truly mixed picture of both resilience and slowdown. Durable goods orders jumped 5.6% in December and Q4 GDP was revised higher to 2.9%. Adding to the picture of resilience is the initial jobless claims which came out this week at a nine-month low of 186,000. On the flip side, leading economic indicators slid further into negative territory in December and the Richmond Fed Survey came in at a -11. Worth mentioning is that the yield curve remains inverted and is the direst indicator of a future slowdown. The uncertainty these conflicting economic data points create explains why the news has an on-again, off-again feel to it. The takeaway is that despite seven interest rate hikes, the economy may not be slowing as fast the Federal Reserve had hoped. This indicates, it may take additional steps, such as another few interest rate hikes, to ensure inflation is dead.
In addition to the economic data, there was an abundance of company news this week. While some companies are reporting mass layoffs not all companies are sheltering in place. The most successful companies find opportunities despite the abundant challenges they face. One example is Microsoft, which announced this week it is making a multi-year multi-billion-dollar investment in OpenAI, the creator of ChatGPT. In recent months, we’ve seen an acceleration of investment in artificial intelligence (AI), which is beginning to transform the world in ways we hadn’t expected. We saw some of this new technology emerge last summer with the introduction of AI that could be used to create art. In fact, Christie’s sold its first piece of AI art at auction in 2018 – a blurred face titled “Portrait of Edmond Belamy” – for $432,000. Artists are not at all happy with this development. We also learned recently that news outlet CNET has been using AI tools to generate 77 published stories since November.
Growing up I envisioned a world where people interacted deeply with technology. As I grew older, I recognized the limitations of technology and understood what humans offer that computers lack. However, we’re quickly approaching a tipping point for technology that will write the stories we read, create the art we consume, and perhaps even replace professions that we never imagined could be replaced. I was raised on the idea of “the singularity,” a point in time when technological growth becomes uncontrollable and irreversible. So many books and movies highlighted the potential for disaster, perhaps none more than HAL from 2001: A Space Odyssey (based on the book by Arthur C. Clarke first published in 1968). Or perhaps the 1983 movie Wargames is more your speed. Either way, I now wonder if the underlying economic impact may be the bigger issue. Not global war. Not being held hostage to technology. But the consequences of a world run by computers. In any event, expect AI and investments in it to skyrocket in the years ahead.
In closing, I want to highlight just how far AI has come. Despite being released only a couple of months ago, ChatGPT apparently can pass an MBA course (early tests indicate it would have received a B to B- on the final exam of a typical MBA course). It is expected the next generation of this technology will likely be able to pass the bar exam, and some believe it will soon be able to pass the difficult U.S. Medical Licensing Exam. What the technology means to those professions is unknown. I’ll also point out that passing an exam, and conducting surgery are two very different things. However, one could envision this technology being used to replace generalists, diagnosticians, radiologists, and other medical professionals whose experience and knowledge may soon be replaceable. Marc Cuban said in an interview this week, “the accomplishments of ChatGPT in the few months since its release cannot be ignored.” I couldn't agree more. Now you know.Bruce J. Mason, MBA