CNBC Daily Open: The A.I. rally's too narrow

The clear winners in the AI race are reaping all the benefits while everyone else is left behind. This could have implications for broader markets.

CNBC Daily Open: The A.I. rally's too narrow

This report comes from CNBC Daily Open today, our new international markets newsletter. CNBC Daily Open keeps investors informed about everything they need to be aware of, wherever they may be. You like what you see? Subscribe here.

The AI race has clear winners. All others are merely bystanders, and they do not reap any benefits. This could have implications on broader markets.

What you should know today

The agreement to suspend the U.S. Debt Ceiling passed the House Rules Committee with a vote of 7 to 6, with all four Democrats and two Republicans voting against it. The bill, which will reduce the budget deficits around $1.5 trillion according to the Congressional Budget Office, will be voted on by the House Wednesday night U.S. Time.

Hong Kong's Hang Seng Index fell around 2%, entering bear market territory. Chinese markets also dropped on the backs of disappointing factory activities in May.

The Chinese economy is not only plagued by weak factory activity. The property market is suffering from tepid sales. Youth unemployment reached a new high in April. And the tourism industry still hasn't recovered after the lifting of Covid locksdowns. Some economists believe the Chinese central bank and government may loosen their monetary policy in order to stimulate the Chinese economy.

Nvidia's market cap briefly reached $1 trillion on Tuesday. The chipmaker's share price fell and lost momentum during the day. Its market capitalization was $990 billion by the close. But that's still nothing to be sniffed at. Its shares are at their 52-week high.

AI is a boon to markets, but also causing concern in other areas of society. "Mitigating AI's risk of extinction should be a priority for the world, alongside other risks on a larger scale such as pandemics or nuclear war," said a one-sentence document signed by tech experts and industry leaders.

The incredible rise of Nvidia has been making headlines, but another chipmaker is also reaping the benefits from the artificial intelligence frenzy. Its stock is up 71% in the past year and has gained more than 32% just on Friday.

Bottom line

AI has clear winners. The rest of the world is not a losers, but rather a spectator who does not benefit. This could have a negative impact on the broader market.

The winners are first. Semiconductor firms -- particularly those that manufacture chips used as the brains for AI models -- are enjoying huge rallies. Nvidia flirted briefly with a $1 trillion dollar market cap on Tuesday. Other chipmakers, like Marvell, Broadcom, and Broadcom, also hit 52-weeks highs, even though their shares fell at the end.

The big tech firms also enjoyed a boost. Apple and Microsoft shares rose to their highest level in a full year amid the AI excitement.

Not everyone is jumping on the bandwagon. Some people even left the bandwagon before it started. Cathie, the famous investor in next-generation technology, sold all of her Nvidia shares in January. Wood wrote in a Monday tweet that $NVDA was priced too high at 25x the expected revenue this year.

The rally has been limited so far. In the last three months, S&P 500 is up nearly 6% but Invesco S&P 500 ETF is down more than 3%.

"We don't see any signs of widespread participation." Andrew Smith, chief investment strategy at Delos Capital Advisors Dallas, said that they were not seeing any early cyclicals atop A.I. Javed Mirza is a technical analyst with Canaccord Genuity in Canada. He warned that this disconnect could cause a market retreat soon.

The broader economy, however, is not doing so well. The oil prices fell more than 4% on Tuesday, a sign that traders are not optimistic about the global economy. According to the Conference Board’s consumer confidence index, U.S. individuals were less optimistic about the economy than they were in April.

Ataman Ozyildirim is senior director of Economics at The Conference Board. He said that "their assessment of the current employment conditions showed a significant deterioration." The May jobs report, which will be released on Friday, should provide a more accurate picture of the current labor market. In markets, the expectations may not match reality, a lesson that we have learned repeatedly since last year.