The ripple effects of AI splurging

AI-driven moodiness on financial markets. I'm David Brancaccio in Los Angeles. Monday, the stock market consensus was that artificial intelligence will ruin swaths of the economy. And we got a big sell-off. Then came Tuesday, where a $100 billion meta-Facebook deal to buy AI chips from advanced microdevices drove a wave of tech optimism that boosted the Nasdaq here 1% in Japan's Nikkei index by more than 2% today. Now, pick a day and market players pick one poll or another on AI. One such market player is Susan Schmidt, Portfolio Manager at Exchange Capital Resources. Good morning. Good morning. Can I say it this way? What is with you people? I mean, it turns on a dime these days. That's fair. That's fair. That's because it's such an unknown. We just have no idea how soon companies are going to realize operating profitability, operating improvements from this AI investment. These are big numbers. Investors just can't figure out what to make with it. I mean, yesterday was guided by huge meta, Facebook, Instagram, etc., doing a huge deal to buy AI chips from advanced micro devices. But today we get the other big AI chip makers results. It'll be late in the day after the market closes. That famous company, NVIDIA. NVIDIA has been very good at under-promising and over-delivering on recent quarters. It really is price for perfection. So investors have expected the best to happen. They're going to see a very strong guide. They want management to talk about how good things are for the future. If NVIDIA misses estimates or talks about margin pressure I think investors have the potential to get very nervous and we could see another swing in AI stocks tomorrow All right And for the rest of us margin pressure what that Margin pressure means that operating profitability comes down rather than expands. For NVIDIA, who's making the chips, the more chips they make, presumably the more profit and the better scale they should have. So the higher profit margins. Susan Schmidt is at Exchange Capital Resources. Yesterday on Marketplace's Half Hour program, my colleague Kai Risdahl spoke to Atlanta Fed President Rafael Bostic, who steps down at the end of this week. Inflation and the labor market were part of that, but also those two syllables, AI. Here's Bostic. There are lots of reports, you all have done a number of these as well, to suggest that these new technologies are going to change the way that businesses think about how many people they need to produce the goods that there that they want to produce. That could be a structural change. If that winds up being true, and it winds up penetrating through the entire economy, all of our benchmarks are going to have to change. Like how we think about what a good jobs number is, or what unemployment rate that's reasonable should be, because the same number is sending a very different signal. Thank you Corporate bonds are generally viewed as riskier than government bonds so they tend to pay higher yields. But when it comes to big tech companies, investors don't see that much more risk. So when it comes to the interest on their bonds? You're not getting a lot of additional compensation to own some of this debt versus just owning treasury securities. That's Lawrence Gillum at LPL Financial. He says the rates big tech companies pay could always go up. For instance, if a big wave of new corporate bonds floods the market, supply might outweigh demand. That means, in theory, that you could see higher yields with this amount of issuance coming to market to attract additional demand. In other words, pay more interest to attract more investment. And if that happens, investors who'd otherwise pour money into the safety of government bonds could be persuaded to throw some money at the corporate sector. You can think about, to some extent, the corporates being substitutes for treasuries, especially those that have a very high quality. Anna Chieslok is a finance professor at Duke University. She says if investors start to favor corporate bonds over treasuries, the interest rate the government pays to borrow could be affected too. Then you can imagine that both yields on treasuries and on corporates move up. That, in turn, could make all kinds of consumer borrowing more expensive. Mortgages, credit cards, auto loans. But Chieselock says that's not guaranteed. For one, corporate bond yields might not rise if there's enough demand for that debt. I don't think these companies are just coming out there and saying, well, we just want to issue. There is a possibility that they are catering to certain demand. Plus there are many other factors that could also influence bond yields this year Stock market volatility inflation expectations tariff uncertainty Zachary Griffiths at the research company Credit Sites says if growth slows this year, government bond yields could actually fall. The softening of the economy pushes the Fed to cut rates more, typically in a slower growth environment. When you have growth concerns, you see longer term yields fall as well. But either way, the sheer amount of new debt expected to hit the market this year will affect rates. Lawrence Gillum at LPL Financial says the Treasury Department is also going to issue trillions of dollars worth of new debt. There's a glut of supply coming to market and demand needs to keep up with that supply. Otherwise, you're going to have higher yields. Especially, he says, if companies keep selling trillions of dollars of bonds. I'm Justin Ho for Marketplace. And in Los Angeles, I'm Niva Brancaccio. It's the Marketplace Morning Report. From APM American Public Media. America's housing system is under strain. From natural disasters to the rising cost of shelter, the challenges we face and the solutions we embrace will shape how we live for the next hundred years. I'm David Brancaccio, host of Marketplace Morning Report, and I've been working with This Old House Radio Hour on a special podcast episode that explores how Americans are reimagining housing in this changing world. It's called Building Tomorrow. From wildfire-resistant houses in California to tiny home communities in Texas to a super-duper energy-efficient house in the Northeast, this special blends innovation, new business models, and personal stories to explore how resilience, affordability, and our climate reality are redefining what home looks like. To listen, go to Marketplace Morning Report in your podcast app.