🤖 AI vs. tariffs

Hey hey, happy Monday.

It’s almost summer. I can already taste the watermelon milkshakes.

Before you head to the beach, we need to talk about this widely held assumption that AI will save the day with ChatGPT erasing any chance of an economic crisis, just like it erased your wrinkles from that late-night club photo.

Not so fast. I’ve got the numbers to prove it. But…it’s complicated. Like it always is. I’ll explain everything in four minutes.

Also, I was SO honored to be a guest on the How to Money podcast to chat about tariffs, interest rates, practical (vs. beautiful) advice and how to stay sane in all of this gestures around me.

And…the Compound gang is coming to Chicago! Join me and a few of my nerdy colleagues at the Chop Shop on June 3 for a live taping of The Compound and Friends, including a special appearance from Morningstar CEO Kunal Kapoor. Buy your tickets here and holler at me if you’ll be there, I’d love to say hi!

Smash the button below to share OptimistiCallie with a friend 😊

Income Advantage ETFs

There’s a weird tension among Wall Street’s smartest nerds right now.

Tariffs are actively biting profits and economists are screaming about a recession. Maybe a slowdown now that Trump has graciously lowered China tariff rates from ludicrous to just extreme.

But Wall Street analysts that cover individual companies have barely flinched in their optimism for the year ahead. Earnings of S&P 500 companies – the 500-odd largest stocks on the market – are projected to grow 7.4% this year. A respectably average year under anything-but-average circumstances.

These forecasts sound too good to be true. So you’re telling me that U.S. companies will be able to grow profits against the pressure of the highest tariff rates in a century? Color me skeptical.

Look a little closer, though, and you’ll notice that there’s an interesting chasm forming between two types of companies: globally exposed consumer companies and the AI-driven tech elite. The smiling door greeters versus the broccoli haircuts, I suppose.

According to analyst estimates, retailer profits could get clobbered this year, with earnings for both consumer discretionary and staples businesses expected to fall. So may energy stocks, which are supposedly on track for a 14% drop in profits this year.

On the other hand, tech stocks are projected to post a 17% gain in profits, propelled by a 34% boost in semiconductor company earnings.

This could be a bet on Americans’ priorities. Make me choose between Barbie or ChatGPT, and I’ll pick my trusty essay-writing LLM sidekick all day. Or it could an acknowledgement that Wall Street has given into the idea that forecasts are especially useless when one Truth Social post can ruin all of your best-laid business plans.

Or…perhaps it’s both.

We may be at an odd juncture where a freight train of AI adoption – a three-year story of rapid innovation and progress – could collide with a massive economic obstacle.

A portfolio smackdown of the ages.

For now, analysts believe AI emerges victorious. You might believe that too after years of seeing the same.

But why?!? Can one slightly overheated trend of robots and meme generators really move the needle for a $28 trillion economy?

The numbers say no. Companies invested an inflation-adjusted $2.2 trillion on computers and other processing equipment plus intellectual property last quarter, about one-seventh of the $16 trillion Americans spent on goods and services.

Yes, that $2 trillion amounts to something, but it’s peanuts compared to the sheer power of our financial decisions. If tariffs intimidate consumers and lead to layoffs that decimate our incomes, then the economy is probably bound for a crisis – robots and all.

AI isn’t completely immune from tariffs, either. While there may be temporary exemptions for electronics, the businesses carrying the AI torch are extra exposed to the ups and downs of international trade. Tech has the highest exposure to global customers and suppliers of any sector in the S&P 500. 

Semiconductor companies are especially vulnerable, with an astounding 67% of revenue coming from international customers. That, plus many companies buying GPUs, chips and AI-related equipment often get the bulk of them from outside the U.S.

It’s fair to say that even after a few months, nobody has a precise handle on how huge tariffs could impact each sector. To me, it’s a bit rich that Wall Street thinks tech – the poster children of international relationships and low-cost manufacturing – will escape almost scot-free when all the second-order effects materialize.

And I want to be clear – AI can eventually have far-reaching benefits for our economy. Benefits that are so entrenched that they can’t be quantified – higher wages, stronger skill sets and increased investment. 

We’re not there yet, though. It takes years for big technological trends to take hold, and productivity usually shines through when workers feel empowered companies feel comfortable expanding. Business confidence is in the dumps and layoffs are spiking, so we’re in the opposite scenario.

So the AI math isn’t mathing.

But is AI’s potential all about the math?

Maybe not.

This is when I have to introduce you to one of the most frustrating tenets of investing: the stock market is not the economy.

The economy is the value that we create. Stocks are an expression of that value, but they trade on the present reality times a multiple of future expectations. AI’s impact on the economy may not bear out through numbers. But in your portfolio, AI’s influence depends on how willing we are to collectively dream up better days ahead. What AI is capable of, and how much money AI-dominant firms will amass in years to come.

After all, dreaming has been a big part of the AI trade. S&P 500 tech companies’ estimated earnings grew about 50% in 2023 and 2024, yet their share prices jumped 112%.

And I’m not even getting into the fact that AI isn’t the main source of big tech’s profits just yet.

Dreaming is par for the course when new tech comes on the scene. And nothing is cut and dry when it comes to the stock market – the ultimate tangled web of logic, psychology, and mixed incentives. If numbers purely drove stock prices, we’d all be rich (or wiped clean by greedy capitalistic thieves).

The problem arises when investors aren’t capable of dreaming. When they’re too focused on present issues to give the future a second thought. Or in big market drops, crushed by financial strain.

Then, the numbers matter. People claw for any concrete evidence of AI’s value. They demand proof in profits, even though companies are spending money on a pivot to the next big thing. Suddenly, big hopes are a bigger problem.

Famed short-seller Jim Chanos described this phenomenon perfectly:

"In bull markets, people put a premium on promises, and in bear markets, they put a discount on reality."

This is what happened in 2000. Investors were willing to dream about this brave new technology called the world wide web until interest rates climbed too high and the computing needs for Y2K were way overblown. Suddenly, the dream died, and tech stock prices came back down to reality.

Today, we all know that dream wasn’t completely off base. The internet dominates our lives and prints money for a handful of companies. Yet the numbers eventually caught up to the stock market after tech shares dropped 80%.

We are not in the early 2000s, and I’m not foolish enough to call this a bubble and predict precisely when it will pop. Nor is it late 2022 days, when ChatGPT first brought the power of neural networks to our fingers.

We’re somewhere between AI saving the world and being an overhyped bust of a technology that can be ripped off by another country.

So AI could help our investments sail through this crisis, or it could expose the economic weaknesses that investors are conveniently overlooking right now.

Personally, I’d lean on history here. Recessions have been powerful forces of nature. And even though AI is a compelling story that can’t be wiped away with one crisis, it’s hard to think it’ll single-handedly save us from the power of 300 million wallets — and lower stock prices.

ChatGPT, prove me wrong.

Thanks for reading!

Callie

Like what you just read? Share it with a friend, pretty please 😊