The AI Market vs. Everything Else

The contrasting performances of the Dow Jones Industrial Average and Nasdaq Composite on Wednesday highlight a growing perception of two distinct markets operating within the U.S. economy: one driven by artificial intelligence (AI), and the other encompassing virtually everything else.

The Dow not only trended upward but also achieved its second consecutive record high, closing above the 48,000 milestone for the first time. This surge underscores the enduring strength of more traditional sectors.

The Dow, comprised of 30 blue-chip companies, is generally considered a barometer of the “old economy.” It primarily features established, large-cap companies –mainstays of the U.S. economy such as banks, healthcare providers, and industrial giants – industries that predate Silicon Valley’s ascendance as a global technological powerhouse.

This week, gains in stocks like Goldman Sachs, Eli Lilly, and Caterpillar largely fueled the Dow’s upward trajectory. These companies represent sectors benefiting from broader economic trends rather than solely relying on AI-driven growth.

While innovators such as Nvidia and Salesforce are also represented within the Dow, the index’s price-weighted methodology means companies with higher share prices wield greater influence. Therefore, the tech sector’s overall “gravity” on the Dow is somewhat diluted compared to other sectors.

This contrasts sharply with the Nasdaq, which utilizes a market capitalization-weighted approach, giving disproportionate influence to technology companies. On Wednesday, the tech-heavy Nasdaq faltered, weighed down by declines in companies like Oracle and Palantir. Even a 9% surge in Advanced Micro Devices (AMD), driven by bullish AI-related growth prospects, couldn’t prevent the Nasdaq from closing in the red. The underperformance also reflects concerns about valuation, with some analysts suggesting a potential cooling-off period for certain heavily hyped AI stocks.

However, market analysts caution against interpreting this divergence as a harbinger of impending doom or evidence of excessive AI exuberance. Instead, they see it as a healthy rebalancing.

“We view it as a constructive development,” notes Josh Chastant, portfolio manager at GuideStone Fund. “There’s nothing inherently wrong with trimming gains, reallocating capital, and ensuring portfolio diversification across other segments of the equity markets.”

Ultimately, the ideal scenario for investors would be a convergence of these seemingly disparate market paths. A unified rally across sectors tends to indicate greater stability and a more sustainable economic outlook. Moving forward, the market will be closely watching whether the “AI market” and the “everything else” market can begin to move in tandem, indicating broader economic health rather than a dependence on a single, albeit powerful, sector.

Why private equity is stuck with ‘zombie companies’ it can’t sell

Private equity firms are grappling with an emerging challenge: a growing number of portfolio companies that are unable to either thrive or fail, existing in a state of prolonged stagnation.

These so-called “zombie companies” are characterized by sluggish or nonexistent growth, insufficient cash flow to consistently meet debt obligations, and a lack of appeal to potential acquirers, even at discounted valuations. Consequently, they remain trapped within a fund’s portfolio beyond the anticipated holding period, often hindering overall fund performance and returns.

— Lee Ying Shan