Two of the hottest growth trends on Wall Street may face a perfect storm of headwinds next year.
Over the past 30 years, Wall Street has enjoyed no shortage of next-big-thing investment trends. Investors have piled into the growth potential presented by the internet, genomics, business-to-business commerce, China stocks, 3D printing, cannabis, and blockchain technology, to name a few key drivers.
At the moment, no two next-big-thing investment trends are garnering more attention than electric vehicles (EVs) and artificial intelligence (AI).
According to Fortune Business Insights, the global EV market is estimated to grow by nearly 18% on a compound annual basis through 2030. This represents a roughly $1.6 trillion annual sales opportunity for new and legacy automakers, and investors clearly haven't wanted to miss out on this expected double-digit growth.
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AI has the ability to make an even bigger splash for investors. A report released earlier this year by PwC calls for a roughly $15.7 trillion benefit to global gross domestic product by 2030.
While both of these next-big-thing trends have intriguing long-term implications for economic growth, a perfect storm of headwinds could cause them to face-plant in 2024.
Investors may hit the brakes on electric-vehicle stocks in 2024
The long-term growth case for EVs is pretty straightforward. With most developed countries wanting to reduce their respective carbon footprint, switching consumer vehicles and enterprise fleets to renewable sources represents an easy solution. Unfortunately, long-term goals and real-world demand don't always align.
Both car dealerships and select automakers have noted a recent softening in EV demand. This weakness looks to be fueled by a combination of higher interest rates and charging infrastructure concerns.
Since March 2022, the Federal Reserve has raised its federal funds rate by 525 basis points. The average interest rate on a 60-month new car loan in the U.S. has practically doubled from 3.85% to north of 7.5% between December 2021 and September 2023. Inflation and higher borrowing costs are pricing buyers out of a new vehicle.
The other concern is the charging infrastructure for EVs. Although EV leader Tesla (TSLA 1.85%) ended September with over 51,100 supercharger connectors, EV range uncertainty and long waits lines associated with Tesla's charging stations persist.
From an investment perspective, EV stocks could absolutely face-plant because of increased competition and price wars. Tesla has meaningfully reduced the sales price of its four production models (3, S, X, and Y) on more than a half-dozen occasions this year. With CEO Elon Musk previously stating that Tesla's pricing strategy is dictated by demand, such aggressive price cuts can only mean that Tesla's demand has fallen and/or inventory levels are rising. Either way, Tesla's operating margin has been more-than-halved over the past year.
The short-term outlook isn't much better for the EV divisions of legacy automakers, either. While they remain quite profitable from the sale of internal combustion engine vehicles, both Ford Motor Company (F 0.47%) and General Motors (GM 4.37%) have walked back preset spending and/or production targets for their EV segments. Considering that Ford and General Motors planned to spend $50 billion and $35 billion, respectively, through 2026 and 2025, this isn't news that should be ignored.
Though the EV space can still produce plenty of winners, 2024 is shaping up to be a difficult year for the auto industry.
Image source: Getty Images.
A recipe exists for artificial intelligence stocks to short-circuit in 2024
It could be a similar story for what's easily the hottest trend of 2023: AI stocks.
AI involves using software and systems to handle tasks that would normally be overseen or undertaken by humans. The addition of machine learning allows AI-driven software and systems to learn and evolve over time, which makes them more efficient and expansive at their tasks. Since AI has utility in virtually all sectors and industries, its economic impact easily transcends into the trillions of dollars.
However, one thing AI doesn't have working in its favor is that history tends to repeat itself on Wall Street -- at least when it comes to next-big-thing investments.
Over the past 30 years, every next-big-thing trend has worked its way through an initial period of euphoria that, ultimately, resulted in a bubble-popping event. Investors chasing next-big-thing trends have a terrible habit of allowing the fear of missing out (FOMO) to get the better of them. But every next-big-thing trend or innovation needs time to mature -- even artificial intelligence. If history were to repeat or rhyme, the AI bubble is set to pop sooner than later.
A secondary issue for the AI industry and AI stocks is that capacity is holding back their expansion. Graphics processing unit (GPU) behemoth Nvidia (NVDA 3.65%), which has become the infrastructure backbone behind the AI movement in high-compute data centers, has been hamstrung by chip-fab giant Taiwan Semiconductor Manufacturing already maxing out its chip on wafer on substrate capacity. Without meaningful production capacity improvements, Nvidia and its peers will struggle to meet extremely lofty investor expectations.
At the same time, production expansion is a bit of a double-edged sword for Nvidia and its peers. With its cost of revenue declining during the first-half of fiscal 2024 (Nvidia's fiscal year began on Jan. 30, 2023), it's pretty clear that pricing power and scarcity for its AI-driven A100 and H100 GPUs are what have driven its triple-digit sales growth. As new competition enters the arena and Nvidia's production expands, it'll quickly lose its too-good-to-be-true pricing power.
AI companies are also contending with a new crackdown on AI-chip exports to China. China is the world's No. 2 economy, and new export restrictions could reduce the AI-related sales potential of companies like Nvidia by billons of dollars each year.
While there's no denying that AI has game changing potential, AI-driven stocks are poised for a rough 2024.
Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia, Taiwan Semiconductor Manufacturing, and Tesla. The Motley Fool recommends General Motors and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.
