1 August 2023 — The AI Inflection Point: Nvidia and the Trillion-Dollar Earnings Shock

Stock markets appear to be having a reasonable year, with the S&P 500 up by double digits through seven months. But look beneath the surface and almost all the gain has come from a handful of companies. Seven businesses — Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla — are responsible for essentially all the rise this year. Journalists have started calling them the “Magnificent Seven.” Everything else is treading water. The reason is one word: AI.

ChatGPT, released last November, became the fastest-growing consumer application in history, reaching 100 million users in two months.¹ Every major technology company has since announced heavy investment in generative AI. The software requires enormous computing power, and the specialised chips to run it are made almost exclusively by one Californian firm, Nvidia — originally best known for graphics cards for video games.

On 24 May, Nvidia released quarterly results that forecast roughly $11 billion of revenue for the following three months, against Wall Street expectations of just $7.2 billion — a 50% forecast miss.² The share price jumped 25% the next day, and by the end of May Nvidia had reached $1 trillion in value for the first time.³ CEO Jensen Huang declared on the earnings call that “the next industrial revolution has begun” and that data centres are becoming “AI factories to produce a new commodity: artificial intelligence.”⁴ Nvidia shares are up more than 200% this year.

Meanwhile, the Fed has quietly reached a milestone. Last Wednesday, it raised interest rates by another quarter-point to 5.25–5.50% — the highest since 2001.⁵ Powell was cautious: “We’re going to be going meeting by meeting. We think we’re going to need to hold policy at restrictive levels for some time.”⁶ Headline inflation has fallen from 9.1% a year ago to roughly 3% — a remarkable improvement — and forecasts of imminent recession keep being pushed further into the future.

The useful lesson for ordinary investors is about concentration. The 10 largest companies in the S&P 500 now account for roughly 30% of the entire index. An investor buying a “diversified” S&P 500 fund is making a very concentrated bet on a small cluster of American technology giants, whether they realise it or not. The more concentrated an index becomes, the more your fortunes depend on a handful of stories going well. For now, the dominant feeling is relief: inflation is falling, the Fed is nearly finished, and a genuinely new technology is starting to change the economy.