Is AI Casting a Cloud Over Investors?

Artificial intelligence is driving markets, but is it also creating uncertainty for investors? Andrew Wilkinson sits down with Kevin Davitt, Head of Index Options Content at Nasdaq, to discuss whether recent market rotation reflects healthy broadening or a cloudier outlook ahead.

Summary – IBKR Podcasts Ep. 352

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Andrew Wilkinson

Welcome to this week’s market minute. I’m Andrew Wilkinson. My guest is Kevin Davitt  from the NASDAQ. Kevin, welcome back to the program. 

Kevin Davitt

Thank you so much for having me, Andrew. I’m looking forward to it. 

Andrew Wilkinson

All right. We just had the delayed January employment report this morning. I think 130,000 jobs were created, unemployment rate down to 4.3%. Half of the job gains came from the healthcare sector, so that’s unusual for a kickoff. But outside of the job picture, anything you want to pick on? How’s the macro picture shaping up from your vantage point, Kevin? 

Kevin Davitt

I think the way you started that with an employment framing is an important one—that some of the concern, big picture, about the market, which we’ve seen kind of come front and center over the past two weeks across different sessions, has been over the resilience and the impact of AI and where it might jeopardize things like jobs. Now, over the past couple of years, the market has remained incredibly resilient, driven in large part by the names we talk about regularly that drive the NASDAQ 100 and the market broadly. But the economy largely comes down to consumer spending, and that is driven by people having jobs. 

So I think your question about the big picture—the market’s always looking forward, right? Or at least we’re told that. And there has been concern about what the next six months or a year looks like. I think a lot of that has been predicated on whether this new outgrowth of technology is going to cannibalize employment. One data point does not necessarily make a trend. But I think I’ve said this before on your podcast: Americans are very good at a number of things, but in particular, they’re good at spending. And your question about the macro picture—I would argue that things are fairly good. I would caveat that with my general tendency to skew toward what could go wrong. And really, today is just another data point. But generally speaking, big picture, it does seem like the economy remains on the rails, and I would say the broadening of the rally is some indication of that, which maybe we’ll get into. 

Andrew Wilkinson

Yeah, I always find that despite the upswing, investors have to continually beat themselves up in order to just kind of say, “Yeah, this is real. Things are okay.” Kevin, can you frame the relative performance of equity prices to start the year? What can you distill from the relative performance of different indices and places? 

Kevin Davitt

I think there has been an interesting performance. Maybe—okay, so we’ll start with year to date, and then, as is my tendency, I’ll broaden that perspective just ever so slightly. Year to date, the NASDAQ 100—the index that I’m very excited to support—has lagged relative to things like the S&Ps and the Russell 2000. The small caps have really been kind of the belle of the ball. If you look more broadly beyond U.S.-centric markets, emerging markets have really done exceptionally well. Places in Asia, like South Korea, are doing very, very well. Now, if you broaden that perspective, the relative performance looks very different. Your question centered on this year has been that small caps and kind of the unloved names have been doing better relative to the names and indices that have led the markets for the better part of the past four years. That makeup, I think, is interesting in terms of what’s often called old economy relative to new economy. And going back to the point you and I were going back and forth on just a minute ago, the back and forth and the potential for technology to improve businesses in other areas is a really exciting development here. 

Andrew Wilkinson

What shadow is AI casting over the market at present? On the one hand, there are efficiencies to be had, but on the other hand, there’s talk of entire sectors becoming increasingly vulnerable to job losses. What are you seeing, and are investors overreacting? 

Kevin Davitt

So the real crux of the concern of late has been around software, and that was driven in no small part by advances from Anthropic—around tools that make it seem like software-as-a-service companies’ business models could be jeopardized. Now, if you look at the performance of some of those names year to date, there are some meaningful drawdowns. And last week, Microsoft was kind of front and center as far as that selling was concerned. 

Your point about the shadow—I think it goes back to people looking at the fact that the markets have done exceptionally well from the 2022 bottoms. And myself included, I’m always looking at, “Man, it’s been a great run. What might I do to protect myself or position toward areas that maybe have been unloved?” And I think that’s going on.  If I focus more specifically on the NASDAQ 100 and look at the relative mix, you see things like semiconductor manufacturers doing exceptionally well this year. So the likes of ASML, Lam Research, and AMAT—they’re all up 30-plus percent. It’s interesting to see names like Micron, Intel, and Texas Instruments doing really, really well. But the names that you and I—and everybody—have talked about for the better part of the past couple of years—the Nvidias, the Broadcoms, the Googles—are kind of middling, up or down 2%, right, for these mega-cap names. 

But what does that mean? It means that money is flowing to different areas of the market. And I would argue, taking a big-picture view, that that is a healthy development. Seeing that torch passed—you know, with the Winter Olympics going on now—it could be viewed as a good sign. And this is coming from somebody who’s always looking for the glass to be half empty. 

Andrew Wilkinson

Well, to stick with the analogies here, Kevin, in order for there to be a shadow, there’s got to be a sun—a light in the background, right? 

Kevin Davitt

I love it—the philosophical angle we’re getting into. With Mother Nature, days getting longer, and I think as we move through this earnings season, we will likely see continued growth in earnings. That has really driven—if you’re a fundamental type and you look at things like P/E ratios—they really have not expanded, and in many areas they’ve contracted over the past year. And so through that lens, right, as we move through Q4 and close the door on earnings for 2025, I think that look back is going to be quite a positive one. Then we shift our attention to what Q1 is going to look like. And generally speaking, it seems like the economy is on the rails. There’s been a broadening and a great deal of dispersion—something you and I talk about periodically. And that can be rewarding from a stock-picker standpoint. How that plays out at the index level is something I pay a whole lot of attention to. 

Andrew Wilkinson

Brilliant. Kevin Davitt, Head of Index Options Content at the NASDAQ—thank you very much for joining me again today. 

Kevin Davitt

My pleasure. 

Andrew Wilkinson

And to the audience, thank you for joining us both. Remember to subscribe wherever you download podcasts. Bye for now.