What if AI encounters issues?AI fuels stock market rise.

Ten days post-Super Bowl, Wall Street witnessed its own version, as some traders on social media dubbed it. Nvidia, a prominent player in AI chip sales, was gearing up for the release of anticipated quarterly earnings that had the potential to influence markets significantly. The company exceeded expectations, reporting a remarkable 265% increase in revenue compared to the previous year. The next day, the S&P 500 saw a 2.5% surge, while the Nasdaq, known for its tech focus, rose nearly 3%. Steve Sosnick, chief strategist at Interactive Brokers, emphasized the pivotal role of Nvidia's AI success in driving market dynamics. However, he raised concerns about the risks associated with market dependency on a narrow group of stocks.

Since the beginning of last year, the stock market has experienced an upward trajectory, primarily fueled by major tech companies riding the wave of enthusiasm surrounding AI. Bulls argue that this trend mirrors the typical concentration seen at the start of a technological revolution, where a few well-resourced firms pioneer and popularize AI.

However, critics caution that the realization of profitable AI applications is still a distant prospect, posing a potential market downturn if the technology fails to meet the lofty expectations set by its proponents. Some analysts express concerns that individuals with investments tied to the S&P 500, such as those with 401(k)s and college funds, could face negative impacts.

Sosnick emphasized the accelerated pace of AI development, highlighting the underappreciated risk associated with the current concentration in the S&P 500. Recent months have seen major stock indexes receive a boost from investors optimistic about the potential benefits of the increasingly prominent technology.

However, these gains were predominantly concentrated in a select group of tech giants commonly referred to as the "Magnificent 7," comprising Alphabet, Amazon, Apple, Meta, Microsoft, Tesla, and Nvidia.

Given that the S&P 500 is weighted based on company value, larger firms hold a more substantial share in the index. An analysis by Reuters revealed that the Magnificent 7 contributed to almost two-thirds of the index's 24% gain in 2023.

"The tech bull market and the broader markets have been fueled by the AI revolution," remarked Dan Ives, managing director of equity research at Wedbush investment firm, to ABC News.

Microsoft, currently the world's most valuable company, witnessed a remarkable 75% surge in its shares since the start of the previous year. This surge began with an announcement in January 2023, stating that Microsoft was investing $10 billion in OpenAI, the AI firm behind ChatGPT. Months later, Microsoft's Bing became the default search engine for ChatGPT. Additionally, Apple, the world's second-largest company, is reportedly devising plans to integrate generative AI across all its devices, as reported by Bloomberg in October. Nvidia, having recently claimed the position of the third-largest company globally, adds to the roster of AI-driven success stories.

While analysts bullish on the market acknowledge the current concentration of AI-driven gains at the top with major tech giants, they anticipate a broader impact as AI becomes more pervasive in the economy, bringing smaller companies into the spotlight.

Mike Loukas, CEO of TrueMark Investments, specializing in ETFs, emphasized that "Chatbots are just the tip of the iceberg," asserting the permanence of the AI revolution. TrueMark Investments offers an ETF allowing investors to buy shares linked to a basket of around two dozen AI-related firms, including both prominent names like Nvidia and lesser-known entities. The ETF has witnessed a 52% surge over the past year.

Loukas noted that the initial stages typically involve investing in visible, well-known companies, but over time, the focus will broaden to include a wider range of players.

The substantial influx of investment in AI has prompted increased corporate spending on the technology, propelling its integration into the broader market and fueling additional gains, according to Dan Ives.

However, skeptics caution against the assumption that AI will prove beneficial for firms beyond a limited set of tech giants. Without broader adoption, they anticipate the current market surge driven by AI could lose momentum.

A recent study by researchers from major universities and federal agencies revealed that fewer than 6% of firms utilized AI-related technologies. While a majority of very large firms reported some level of AI use, skeptics highlight the need for wider adoption to sustain the market momentum.

Kristina McElheran, a business professor at the University of Toronto and co-author of the study, highlighted the challenge of accurately assessing private sector AI use due to the lack of a universally agreed-upon definition and some companies keeping their efforts confidential. Despite market enthusiasm for AI, there's a concern that the excitement and investment are surpassing the actual adoption and absorption within firms, creating a troublesome disconnect.

Steve Sosnick of Interactive Brokers emphasized that a successful AI boom would necessitate adoption from companies of all sizes, including those without an immediate connection to the technology. He questioned the tangible benefits of AI for regular companies and noted that Nvidia is essentially providing tools to the industry but questioned whether AI's success or failure hinges on its impact on the bottom line of other companies, which remains unclear.