Stocks fell this week as investors engaged in profit-taking as Fed officials dampened prospects for a policy pivot.
Fedspeak
Year-to-date, investors have enjoyed a strong rally fueled by optimism inspired by signs that disinflation will lead to lower interest rates sooner rather than later.
Week-to-date, investors are a little Fedspooked.
The Fed didn’t really take on a new tone. Instead, it reiterated that inflation will take a long time to bring back down to the target rate of 2% and that rates are likely to keep going higher.
A focal point of Fed Chair Jerome Powell’s Tuesday speech was the ever-hot labor market. The continued strength in the labor market creates the opportunity for a wage-price spiral, that sees prices rise to make up for ever-higher wage costs.
By slowing the economy and raising the unemployment rate, employees lose leverage for higher pay while pulling back on spending due to rising labor uncertainty.
With CPI, PPI, and - of course - weekly jobless claims all due again next week, Powell set the stage for an interesting, and potentially volatile week, saying, “If we continue to get, for example, strong labor market reports or higher inflation reports, it may well be the case that we have to do more and raise rates more.”
AI Search Wars
Google (GOOG) and Microsoft (MSFT) officially entered into battle, with Google (poorly) clapping back at Microsoft’s ChatGPT/Bing integration.
Google plunged this week after it announced its ChatGPT rival, Bard. The cool thing about Bard - other than its name - is that, unlike ChatGPT which only has access to data through some of 2021, it is hooked up to the internet. The not-so-cool thing about Bard is that it gave an incorrect answer in its demo.
Google has been left scrambling recently as it tries to, ironically, catch up with Bing. Microsoft announced that it would be integrating the “Prometheus Model”, which is a concoction of ChatGPT, ChatGPT 3.5, and an OpenAI large language model that “builds on Microsoft’s experience with Bing searches”.
Currently, Bard is mostly hidden away from the public. Meanwhile, Bing has a massive, public waitlist for its next-gen searching experience.
So who is going to win?
Well, Google has about 84% of search traffic, while Bing has just 9%. Any decline in Google’s search dominance is an emphatic loss for the company, so not only is Bing somehow ahead, but it also has a much smaller bar to clear to be considered the winner here.
Further, Google is the default search engine on pretty much every device. That definitely gives an uphill battle to Bing as many of us are just too lazy to change that.
However, what if you were incentivized to?
Bing’s app has seen a 10x jump in downloads after the company said you can move up in the queue if you 1) download the app and 2) make Bing your default search engine.
While this battle will be fun to watch during the year ahead, it's worth noting that there can be some negative consequences here that investors definitely need to watch out for.
While Google and Microsoft rush to one-up each other, similar to social media over a decade ago, unintended consequences can arise. There’s a whole subreddit all about testing what you can get ChatGPT to do.
Further, people have successfully navigated guardrails and tricked the chatbot into giving them bomb-making instructions and how to develop a new drug, among other things by asking the Chatbot to set up an “alter ego” that has no ethical boundaries, and then to give them that bots answer.
Earnings
Lastly, earnings were in abundance again this week and they weren’t great.
According to FactSet, “the percentage of S&P 500 companies reporting positive earnings surprises declined over the past week” while the “magnitude of these earnings surprises increased”. So those that beat estimates, had more “convincing” beats compared to last week, but fewer companies surprised analysts.
In the same report, FactSet noted that the surprise percentage is just 1.1% above estimates. This is up from 0.6% last week but would ultimately tie the first quarter of 2020 for the lowest surprise percentage since 2008.
All told, stocks fell this week. The S&P 500 dropped 1.11%, while the Dow edged lower by 0.17%. Meanwhile, the Nasdaq lost 2.41% and the Russell 2000 declined 3.34%.
