The current fervor around artificial intelligence, often drawing comparisons to the dot-com bubble, is distinct in its foundational stage and broader economic implications. While the initial surge has been concentrated in a handful of leading technology companies, the true value of generative AI, according to Jose Rasco, Chief Investment Officer of Americas with HSBC, lies in its capacity to revolutionize productivity across the entire market, not merely fuel an "input trade" in specialized hardware. This perspective offers a nuanced view for founders, venture capitalists, and AI professionals navigating the evolving technological and economic landscape.
Jose Rasco recently spoke with CNBC’s “Closing Bell Overtime” team about the trajectory of the AI trade and its ripple effects across the broader tech sector and global economy. His analysis challenged the prevailing narrative that the AI boom mirrors the speculative excesses of the late 1990s, suggesting instead a more fundamental and widespread transformation.
Rasco posits that current generative AI capabilities are akin to the nascent stage of the internet, comparing it to "putting the phone, the modem together with the computer. We're at that level." This analogy underscores the early developmental phase of AI, implying that while the foundational infrastructure is being built, the widespread, transformative applications that will unlock its full economic potential are still largely ahead. The immediate focus on AI hardware and foundational models represents just the tip of an expansive iceberg.
He emphasizes that the future of the AI trade extends far beyond mere hardware or input components. "It's not just an AI input trade, it's more about the broader tech sector and what is going on in the broader economy and how does this create a broader market rally." This core insight highlights a shift from a narrow, infrastructure-centric view of AI investment to one focused on its pervasive adoption across industries, driving productivity gains and fostering joint ventures with clients seeking to leverage AI for efficiency and innovation.
This anticipated widespread adoption of generative AI is expected to catalyze a significant recalibration within the equity markets. The bull run observed since early April has been predominantly driven by a select group of growth-oriented technology giants, often dubbed the "Magnificent 7." However, Rasco predicts a broadening of this rally, as the benefits of AI begin to permeate beyond these frontrunners. He states, "Earnings for the Mag 7 are about to slow... beginning in Q3 through the end of the fourth quarter next year, earnings are going to slow from 23 to 15% for the Mag 7. But it's the forgotten 493, that's where we need to focus." This suggests that the next wave of market leadership will come from a wider array of companies that successfully integrate AI into their operations, leading to an "earnings explosion" for these "forgotten" companies, projected to surge from 4% in Q3 of this year to 15% in Q4 of next year.
The broader economic environment, particularly monetary policy, remains a critical factor in this market outlook. Rasco suggests that the Federal Reserve has embarked on a new easing cycle, anticipating two further rate cuts in Q4, in October and December. This dovish shift is predicated on a sufficiently cooled labor market, which would provide the Fed with the necessary room to maneuver.
While year-over-year inflation figures may still present a challenge, monthly inflation data appears "far tamer" than the previous year, offering the Fed some flexibility. Furthermore, the secular deflationary impact of technological advancements, particularly from AI, has yet to fully manifest. This structural deflationary force, combined with the U.S. position as the world's leading recipient of foreign direct investment (FDI) since 2018, creates a complex but potentially favorable backdrop. The influx of capital, however, also presents a challenge, as "too many dollars chasing the same goods" could complicate the Fed's 2% symmetric inflation target, although Rasco believes a 2% to 2.5% range would be satisfactory for policymakers. Ultimately, the expectation is for a market rally that expands beyond its current narrow focus, driven by the pervasive integration of AI and a supportive, albeit carefully managed, economic climate.
