The U.S. government will “not hesitate to crack down” on harmful business practices involving artificial intelligence, the head of the Federal Trade Commission warned Tuesday in a message partly directed at the developers of widely-used AI tools such as ChatGPT.
FTC Chair Lina Khan joined top officials from U.S. civil rights and consumer protection agencies to put businesses on notice that regulators are working to track and stop illegal behavior in the use and development of biased or deceptive AI tools.
Much of the scrutiny has been on those who deploy automated tools that amplify bias into decisions about who to hire, how worker productivity is monitored or who gets access to housing and loans.
But amid a fast-moving race between tech giants such as Google and Microsoft in selling more advanced tools that generate text, images and other content resembling the work of humans, Khan also raised the possibility of the FTC wielding its antitrust authority to protect competition.
“We all know that in moments of technological disruption, established players and incumbents may be tempted to crush, absorb or otherwise unlawfully restrain new entrants in order to maintain their dominance,” Khan said at a virtual press event Tuesday. “And we already can see these risks. A handful of powerful firms today control the necessary raw materials, not only the vast stores of data, but also the cloud services and computing power that startups and other businesses rely on to develop and deploy AI products.”
Khan didn’t name any specific companies or products but expressed concern about tools that scammers could use to “manipulate and deceive people on a large scale, deploying fake or convincing content more widely and targeting specific groups with greater precision.”
She added that “if AI tools are being deployed to engage in unfair, deceptive practices or unfair methods of competition, the FTC will not hesitate to crack down on this unlawful behavior.”
Khan was joined by Charlotte Burrows, chair of the Equal Employment Opportunity Commission; Rohit Chopra, director of the Consumer Financial Protection Bureau; and Assistant Attorney General Kristen Clarke, who leads the civil rights division of the Department of Justice.
As lawmakers in the European Union negotiate passage of new AI rules, and some have called for similar laws in the U.S., the top U.S. regulators emphasized Tuesday that many of the most harmful AI products might already run afoul of existing laws protecting civil rights and preventing fraud.
”There is no AI exemption to the laws on the books,” Khan said.
A U.K. regulator made the surprising decision Wednesday to block Microsoft Corp.’s deal for Activision Blizzard Inc. in a further sign of resistance to the power of Big Tech.
The U.K.’s Competition and Markets Authority announced Wednesday that it would prohibit the $69 billion deal as the merger could hurt competition in the nascent market for cloud gaming. The decision comes after the agency said in late March that it no longer thought the deal would threaten console gaming, which is a vastly larger and more established…
A Google Cloud logo at the Hannover Messe industrial technology fair in Hanover, Germany, on Thursday, April 20, 2023.
Krisztian Bocsi | Bloomberg | Getty Images
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Bank stocks fell as First Republic reignited fears. Meanwhile, Alphabet and Microsoft beat earnings estimates, giving markets a chance to rally around tech.
Alphabet, Google’s parent company, reported a 3% increase in first-quarter revenue to $69.79 billion from a year earlier, though net income fell from $16.44 billion to $15.05 billion. Nonetheless, the technology giant beat earnings and revenue forecasts after missing both for four straight quarters. Also, its cloud business finally turned profitable. Alphabet shares rose 1.68% in extended trading.
Microsoft’s revenue increased 7% year over year to $52.86 billion, and its net income rose 9% to $18.3 billion for the quarter ended March 31. Both top and bottom line numbers beat expectations, causing shares to surge 8.45% in overnight trading.
Can optimism in tech save markets from resurgent bank fears?
Investors must have felt an unwelcome sense of déjà vu. First Republic lost almost half its value in a single trading day, dragging down other regional banks. Western Alliance Bancorp lost 5.58%, Charles Schwab fell 3.93% and PacWest Bancorp sank 8.92% (though the Los Angeles-based bank managed to recoup its losses in overnight trading after reporting its earnings).
Bigger banks weren’t spared, either: The broader SPDR S&P Bank ETF lost 3.68%. Across the Atlantic, UBS shares dropped even though the Swiss bank managed to increase assets in March, suggesting investors are still jumpy at any sign of weakness in banks.
Losses in the financial sector weighed on major stock indexes. The Dow Jones Industrial Average slid 1.02%, the S&P 500 ended the day 1.58% lower and the Nasdaq Composite lost 1.98%.
However, Wednesday could look like a very different trading day in the United States. Investors were pleased with how both Alphabet and Microsoft managed to beat estimates on profit and revenue. Shares of those tech giants popped in extended trading and are likely to post more dramatic surges later today. Given Alphabet’s and Microsoft’s immense market capitalization, broader markets stand to benefit from their rise as well.
If Meta, which is due to report after the bell Wednesday, continues the streak of big tech surpassing Wall Street’s expectations, investors could be in for two good trading days for the Nasdaq, at the very least. That could be enough to banish any lingering sense of déjà vu surrounding banks.
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A sign reading “I’m Feeling Lucky” outside the Google Inc. regional headquarters in Paris, France, on Thursday, April 6, 2023.
Nathan Laine | Bloomberg | Getty Images
This report is from today’s CNBC Daily Open, our new, international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.
Bank stocks fell as First Republic reignited fears. Meanwhile, Alphabet and Microsoft beat earnings estimates, giving markets a chance to rally around tech.
Alphabet, Google’s parent company, reported a 3% increase in first-quarter revenue to $69.79 billion from a year earlier, though net income fell from $16.44 billion to $15.05 billion. Nonetheless, the technology giant beat earnings and revenue forecasts after missing both for four straight quarters. Also, its cloud business, Azure, finally turned profitable. Alphabet shares rose 1.3% in extended trading.
Microsoft’s revenue increased 7% year over year to $52.86 billion, and its net income rose 9% to $18.3 billion for the quarter ended March 31. Both top and bottom line numbers beat expectations, causing shares to surge 9% in overnight trading.
Turning to banks, UBS’ first-quarter profit fell 52% year on year to $1.03 billion, largely because of a $665 million provision it had to make for litigation related to mortgage-backed securities the bank sold almost 20 years ago. However, the bank’s wealth management unit attracted $28 billion amid the banking turmoil in March. Still, that news couldn’t stop shares from sliding 2.17%.
First Republic Bank fared worse. On Monday, the U.S. bank reported after markets closed that its deposits sank 40.8%; on Tuesday, traders fled the stock, causing it plummet 49.38% to hit a record low.
PRO Artificial intelligence-focused stocks are set for a period of extreme growth, according to Adam Parker, founder and CEO of Trivariate Research and previously Morgan Stanley’s chief U.S. equity strategist. Here are 25 stocks that can capitalize on the A.I. boom, with 15 of them up 20% year to date.
Can optimism in tech save markets from resurgent bank fears?
Investors must have felt an unwelcome sense of déjà vu. First Republic lost almost half its value in a single trading day, dragging down other regional banks. Western Alliance Bancorp lost 5.58%, Charles Schwab fell 3.93% and PacWest Bancorp sank 8.92% (though the Los Angeles-based bank managed to recoup its losses in overnight trading after reporting its earnings).
Bigger banks weren’t spared, either: The broader SPDR S&P Bank ETF lost 3.68%. Across the Atlantic, UBS shares dropped even though the Swiss bank managed to increase assets in March, suggesting investors are still jumpy at any sign of weakness in banks.
Losses in the financial sector weighed on major stock indexes. The Dow Jones Industrial Average slid 1.02%, the S&P 500 ended the day 1.58% lower and the Nasdaq Composite lost 1.98%.
However, Wednesday could look like a very different trading day in the United States. Investors were pleased with how both Alphabet and Microsoft managed to beat estimates on profit and revenue. Shares of those tech giants popped in extended trading and are likely to post more dramatic surges later today. Given Alphabet’s and Microsoft’s immense market capitalization, broader markets stand to benefit from their rise as well.
If Meta, which is due to report after the bell Wednesday, continues the streak of big tech surpassing Wall Street’s expectations, investors could be in for two good trading days for the Nasdaq, at the very least. That could be enough to banish any lingering sense of déjà vu surrounding banks.
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Unlike other bank failures, including Silicon Valley Bank’s recent collapse, First Republic’s troubles have largely stemmed from its inability to save itself, even with a multi-billion dollar lifeline from other major banks, he explained.
“There’s one big difference between now and 2008: This time there is no systemic contagion,” Cramer said. “It’s a miserable moment for First Republic — once a bank beloved by the rich and famous — but it’s an all-clear event for everyone else.”
Outside of First Republic, which saw its stock tumble over 49% on Tuesday, there were some other big losers on the day. UPS dropped nearly 10% on a disappointing earnings report, while life science and medical diagnostics company Danaher fell 8% and hit a 52-week low.
“While all three stocks jumped in after-hours trading, it might not matter, though, to tomorrow’s action, given the obsessive focus on this broken, darn bank,” Cramer said.
In response, a First Republic spokesperson told CNBC: “We remain fully committed to serving our communities, and we are grateful for the ongoing support of our clients and colleagues. Despite the uncertainty of the past two months, and while average account sizes have decreased, we have retained over 97% of client relationships that banked with us at the start of the first quarter.”
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Microsoft Corp. shares headed toward their highest prices in more than year in Tuesday’s extended session, after the software giant reported better-then-expected profit and revenue and guided for continued strong results in an uncertain economy.
Microsoft MSFT reported fiscal third-quarter profit of $18.3 billion, or $2.45 a share, up from $2.22 a share a year ago. Revenue grew to $52.86 billion from $49.36 billion in the same quarter last year. Analysts on average were expecting earnings of $2.24 a share on sales of $51.02…
Soon, artificial intelligence could help teach your kids and improve their grades.
That’s according to billionaire Microsoft co-founder Bill Gates, who says AI chatbots are on track to help children learn to read and hone their writing skills in 18 months time.
“The AI’s will get to that ability, to be as good a tutor as any human ever could,” Gates said in a keynote talk on Tuesday at the ASU+GSV Summit in San Diego.
AI chatbots, like OpenAI’s ChatGPT and Google’s Bard, have developed rapidly over the past several months, and can now compete with human-level intelligence on certain standardized tests. That growth has sparked both excitement over the technology’s potential and debate over the possible negative consequences.
Count Gates in the camp of people who are impressed. Today’s chatbots have “incredible fluency at being able to read and write,” which will soon help them teach students to improve their own reading and writing in ways that technology never could before, he said.
“At first, we’ll be most stunned by how it helps with reading — being a reading research assistant — and giving you feedback on writing,” said Gates.
Historically, teaching writing skills has proven to be an incredibly difficult task for a computer, Gates noted. When teachers give feedback on essays, they look for traits like narrative structure and clarity of prose — a “high-cognitive exercise” that’s “tough” for developers to replicate in code, he said.
But AI chatbots’ ability to recognize and recreate human-like language changes that dynamic, proponents say.
Kevin Roose, a New York Times tech columnist, wrote last month that he’s already used programs ChatGPT to improve his writing, using the AI’s ability to quickly search through style guides online.
Some academics say they’re impressed by chatbots’ ability to summarize and offer feedback on pieces of text, or even to write full essays themselves.
However, those same academics warn that the technology is not yet fully formed, and can inadvertently introduce significant errors or misinformation. And AI technology must improve at reading and recreating human language to better motivate students before it can become a viable tutor, Gates said.
“If you just took the next 18 months, the AIs will come in as a teacher’s aide and give feedback on writing,” said Gates. “And then they will amp up what we’re able to do in math.”
The idea that chatbots will excel at reading and writing before math may be somewhat surprising: Algebra and calculus are often used to develop AI technology.
But chatbots, which are trained on large datasets, often struggle with mathematical calculations, experts note. If a solved math equation already exists within the datasets the chatbot is trained on, it can provide you with the answer. But calculating its own solution is a different story.
Gates said he regularly asks Microsoft AI developers why chatbots can’t perform relatively simple calculations, or even multiply some numbers. The answer: AI needs improved reasoning abilities to handle the complexity of a math calculation.
It may take some time, but Gates is confident the technology will improve, likely within two years, he said. Then, it could help make private tutoring available to a wide swath of students who might otherwise be unable to afford it.
That’s not to say it’ll be free, though. ChatGPT and Bing both have limited free versions now, but the former rolled out a $20-per-month subscription plan called ChatGPT Plus in February.
Still, Gates said it’ll at least be more affordable and accessible than one-on-one tutoring with a human instructor.
“This should be a leveler,” he said. “Because having access to a tutor is too expensive for most students — especially having that tutor adapt and remember everything that you’ve done and look across your entire body of work.”
The economic calendar is light next week and Federal Reserve officials are in a quiet period before their next meeting in early May. But then there are corporate earnings reports, which will overshadow everything else, market-wise. More than one third (35%) of the S & P 500 reports earnings next week — including megacaps Microsoft, Alphabet, Meta Platforms and Amazon — versus less than 12% in the week just ended and only 2% last week. Communication Services stocks have soared 20% in 2023 (thank you Meta, +77% YTD). Information technology names are ahead 19% (Alphabet and Microsoft, both +19%). Consumer discretionary stocks have climbed 14% (Amazon + 27%). “We do think that the tech companies are going to meet expectations,” Chris Zaccarelli, chief investment officer at Independent Advisor Alliance in Charlotte, North Carolina said. He’s not the only sanguine one. “There’s enough of a balance between well run companies that tend to do well agnostic of economic activity, manage their expenses coming into this quarter that likely, we’re gonna have more good news, than bad news. But the bad news likely ushers with it more punishment than usual because of how well these stocks have performed over the course of the last six weeks,” said Art Hogan, chief market strategist at B. Riley Wealth Management. What worries Zaccarelli is the outlook for the rest of the year. “Our concern is that valuations are already so high, I think a lot is already in the price. I think there’s a lot of room for disappointment, whether that’s in not beating expectations enough or more likely on forward guidance.” Technology managements are likely to “indicate that the future is muddled, it’s uncertain, and that they’re taking steps to prepare for potential economic weakness to come…so much good news is already priced in, that it’s going to be really hard to surprise to the upside at this point,” Zaccarelli said. EPS cuts ahead Which only adds to a bear case that, entering May, risk in the market is rising. “The history of negative EPS revision cycles comparable to the one we’re seeing this cycle suggest more downside is in the cards for both share prices and [earnings] estimates,” Venu Krishna, head of U.S. equity strategy at Barclays Capital wrote this week. Barclays studied four other periods since the mid-1980s when earnings estimates for the S & P 500 for the following 12 months have fallen by more than 5%, and when the Conference Board’s Index of Leading Economic Indicators is as weak as it is today. Every other time, earnings estimates fell about 25%, leaving Krishna this time “incrementally confident that EPS cuts are far from done.” So far this quarter, S & P 500 earnings are running 4.7% below the same period a year ago, Refinitiv data shows. With the outlook for the rest of 2023 so uncertain, the ghost of recession future is hanging over the stock market, especially since lower Treasury market yields, the Federal Reserve staff, leading economic indicators, a slowdown in bank lending, and the past week’s Philadelphia Fed and jobless claims surveys are all conspiring to point to a contraction. Sell in May? Even analysts who don’t foresee a recession aren’t optimistic about the immediate outlook for stocks. “My bullish vibrations are wearing thin short term,” said Jeffrey Hirsch, editor in chief of the Stock Trader’s Almanac . “I am not expecting the market to take out the October low or the economy to enter a recession,” but the prospects during what are typically the worst six months of the year (from May through October) “are dim,” he said. After all, the S & P 500 is up 7.7% so far in 2023 and, remarkably, more than 90% of that return has occurred since Silicon Valley and Signature banks failed in mid-March, less than six weeks ago. Investors aren’t only rattled by Federal Reserve monetary policy, the pace of inflation and an economic slowdown, Hirsch said. There’s also the looming battle over the Federal debt ceiling. Earlier this week, economists at Goldman Sachs led by Jan Hatzius wrote that “weak tax collections so far in April suggest an increased probability that the debt limit deadline will be reached in the first half of June,” rather than early August, which the investment bank had previously projected. This debt ceiling debate is eerily like the last one in 2011, Hirsch said, which from a seasonal point of view, was also the year before a presidential election with Democrats in control of the White House and the Senate and Republicans the House of Representatives. Back then, the S & P 500 fell 19.4% from its April high to a low on October 3. Meanwhile, next week is the last full trading week before Wall Street’s old adage to “sell in May and go away” takes hold. At some point soon, that “will likely be the prudent course of action,” Hirsch said. Week ahead calendar Monday 10:30 a.m. ET: Dallas Fed manufacturing survey (April) Earnings: Coca-Cola, Whirlpool, First Republic, Packaging Corp. of America Tuesday 8:30 a.m. ET: Philadelphia Fed service sector survey (April) 9:00 a.m. ET: FHFA Home Price index (February); S & P Case-Shiller home price indexes (February) 10:00 a.m. ET: Conference Board consumer confidence survey (April); New home sales (March); Richmond Fed index (April) Earnings: Alphabet, Microsoft, Visa, Paccar, PepsiCo, Biogen, General Electric, Northern Trust, General Motors, 3M, McDonalds, Boston Properties Wednesday 8:30 a.m. ET: Durable goods orders (March); Wholesale inventories (March) Earnings: Meta Platforms, Norfolk Southern, Hilton Hotels, Boeing, Ebay, KLA-Tencor, Pioneer Natural Thursday 8:30 a.m. ET: Jobless claims (week ended April 22); Q1 GDP (first preliminary) 10:00 a.m. ET: Pending home sales (March) 11:00 a.m. ET: Kansas City Fed manufacturing index (April) Earnings: Amazon, Intel, Amgen, Eli Lilly, Merck, Bristol-Byers Squibb, AbbVie, Hershey, Caterpillar, Honeywell, Mastercard Friday 8:30 a.m. ET Personal income (March); Consumer spending (March); Core PCE (March) 9:45 a.m. ET: Chicago (PMI) April Earnings: Chevron, ExxonMobil, Colgate-Palmolive —CNBC’s Samantha Subin, Alexander Harring, Robert Hum and Michael Bloom contributed to this report.
Here are the biggest calls on Wall Street on Friday: Barclays names Dick’s a top pick Barclays named the sporting goods store a top pick and says it sees accelerating growth. “We view 2022 as the new solid foundation from which DKS can now reaccelerate • its growth algorithm through: 1) sustainable positive comp growth driving market share gains, 2) gross and operating margin expansion as it exits a period of supply chain disruption.” HBSC upgrades AT & T to buy from hold HSBC said in its upgrade of the stock after its earnings report that investors should buy the dip. “But a slowdown in market momentum has been widely flagged (by all operators) for months, and AT & T’ s absolute growth in mobile subs remained solid.” Read more about this call here . Bank of America reiterates Alphabet as buy Bank of America says it’s bullish heading into Alphabet earnings next week. “We think 1Q could show cost improvement upside, while in-line search results could be a modest positive for market share concerns (we think street will see better evidence of cost cutting and margin improvement by 2Q).” JPMorgan reiterates Amazon as a best idea JPMorgan says it’s bullish heading into the e-commerce giant’s earnings report next week. “We’re modeling continued e-comm share gains in 2023 as AMZN & other retailers gain share in key under-penetrated categories such as grocery, CPG, apparel & accessories, & furniture/appliances/equipment.” Morgan Stanley reiterates Blackstone as overweight Morgan Stanley says the alternative investment management company is “resilient.” “We believe BX is best positioned to navigate the backdrop, capitalize on dislocation with $190b dry powder & propel earnings power.” Argus upgrades Dollar General to buy from hold Argus said in its upgrade of the dollar store company that it’s “rare retailer.” “We are raising our rating on Dollar General Corp . to BUY from HOLD and setting a one-year price target of $250. DG is a rare retailer that is growing square footage and posting positive comparable sales. Our five-year growth rate is 11%.” UBS initiates Bill.com as buy UBS said in its initiation of the software billing company that shares are attractive at current levels. “Since we’re a bit more constructive than the Street and negativity already seems embedded in BILL shares (amongst worst performing software stocks YTD), we view risk/reward as biased upward at these levels.” Piper Sandler downgrades Big Lots to underweight from neutral Piper said in its downgrade of Big Lots that it sees demand slowing. “Big ticket discretionary demand appears to be deteriorating (despite easier y/y compares), and we are worried about companies with break-even EBITDA (or worse).” Morgan Stanley downgrades Seagate to equal weight from overweight Morgan Stanley said in its downgrade of Seagate that it sees a recovery pushout for the hard disc data drive company. “As a result, we believe path to outperformance has also been pushed out, with risk more elevated near term.” Wells Fargo names Starbucks a top pick into earnings Wells says Starbucks is a “best idea” heading into earnings on May 2 and the “China inflection adds upside.” “Shares are -2% post-Q1 & we see improving Q2 risk/reward behind ongoing domestic strength (positive Q2 traffic; Ex 29), a likely China inflection (vs. a very low Q2 bar) & anticipated upside to the FY23 outlook.” Cantor Fitzgerald initiates CVS as buy Cantor said in its initiation of the stock that it’s underappreciated. “We are initiating coverage of CVS Health with an Overweight rating and 12-month price target of $87; Investors are underestimating the power of the flywheel CVS is piecing together, in our opinion.” Cantor Fitzgerald initiates UnitedHealth as buy Cantor said in its initiation of the healthcare company that it sees near-term earnings upside. ” United is ahead of the market in using commercial product innovation to solve for the problem of employers wanting to hold price trends, while providers are looking for a three-year step-up from historical averages.” Benchmark initiates Sea Limited as buy Benchmark initiated the Singapore-based internet tech company with a buy and says it sees rapid growth ahead. “We believe that SE should remain a key beneficiary of Southeast Asia’s fast growing digital economy in years to come.” Benchmark initiates Grab Holdings as buy Benchmark said in its initiation of the Asian internet company that it’s a “significant market consolidator” “As part of our industry launch of Southeast Asia Ecommerce, we are initiating coverage of GRAB, a leading platform player offering mobility, delivery, fintech and enterprise services in SEA (Southeast Asia Ecommerce).” JPMorgan upgrades XPO to overweight from neutral JPMorgan said in its upgrade of the logistics company that it likes the company’s recent management changes. “Our estimates remain unchanged but we are upgrading to Overweight with a higher, yet still discounted, multiple compared to peers as we believe this strategic hire should help unlock the potential at XPO which is still not completely reflected in the stock.” Read more about this call here. Goldman Sachs reiterates Philip Morris as buy Goldman says the tobacco company is an “earnings compounder with attractive valuation.” “Ultimately, we believe mgmt’s Q2 guide is conservative and therefore we see a nice set up for a potential beat and raise quarter. This, in addition to PM’s Investor Day in September, should be positive catalysts for the stock.” Read more about this call here. Morgan Stanley reiterates Spotify as overweight Morgan Stanley raised its price target on the stock to $160 per share from $130 and says “price increases, margin expansion, and market share” will drive the stock. “We continue to see streaming music & audio as an attractive growth market and remain OW WMG and SPOT.” Wells Fargo reiterates Microsoft as overweight Wells says expectations are “mixed” heading into earnings next week, but that the firm is standing by the stock. “While optimizations and macro are likely to impact FQ3 results, we see favorable offsets forming beyond, inc. MSFT’s ability to both consolidate spend from incumbent categories (productivity, biz apps, security) & gain share in newer ones.” Truist downgrades Tesla to hold from buy Truist said in its downgrade of the stock that it was surprised by the company’s “willingness to accept lower margins.” “What surprised us is TSLA’s stated willingness to reduce price further, accepting still lower automotive margins, to broaden & deepen its ability to generate revenue from AI projects, most notably FSD.” Goldman Sachs reiterates ServiceNow as buy Goldman says it’s bullish heading into the work flow solutions company’s earnings report next week. “We expect investors to put more weight on NOW’ s 1Q results, despite it being a seasonally weak quarter, as they look for signs of continued durability.” Truist initiates CyberArk as buy Truist initiated the cyber security company with a buy and says it has a first mover advantage. ” CYBR is a leader in Privilege Access Management, which is becoming a critical layer of cybersecurity and center of identity security. The company’s transition to a subscription-based model has resulted in strong visibility and durability of its business as well as higher customer lifetime value.” Baird reiterates McDonald’s as outperform Baird says it’s bullish heading into earnings next week. “We see potential for Q1 comps/EPS to exceed estimates (perhaps already priced in?), and we continue to believe MCD can fuel solid operating momentum in the balance of 2023 despite possible economic headwinds.” Stephens upgrades Pool Corp. to overweight from equal weight Stephens said in its upgrade of Pool that it sees an “attractive entry point” for the pool company. “The stock could tread water in the ultra-near-term as seasonally it is still too early to fully gauge activity levels, which could keep investors waiting. However, we think 20x next year’s earnings for a best-in-class, high quality compounder that consistently puts up 25%-30% ROIC, consistent market out-performance and strong FCF is an attractive entry point.” Stephens initiates SentinelOne as overweight Stephens initiated the cyber security company with an overweight and says it has “best-in-class growth.” ” SentinelOne’s platform addresses many of the highest priority areas of security spending.” JPMorgan reiterates Charles Schwab as overweight JPMorgan says Charles Schwab could be worth more if it were to “de-bank.” “While earnings would fall materially were Schwab to de-bank, we believe Schwab would trade at a higher (possibly meaningfully higher) multiple, which would/ could justify a higher value than the stock is trading at today. … .Schwab could feasibly de-bank. Schwab is not a bank, but rather is a broker that operates a bank, and as such we see it feasible that Schwab could operate without a bank.”
Tourists bustle in front of Huawei’s global flagship store near Nanjing Road Pedestrian street in Shanghai, China, March 21, 2023.
CFOTO | Future Publishing | Getty Images
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China’s economy boomed in the first three months of the year. In the U.S., regional banks’ earnings reports weren’t a disaster, but neither were they a picture of health.
China reported its first-quarter gross domestic product popped 4.5% from a year earlier, more than economists’ expectation of 4% and the highest since the first quarter of 2022. Retail sales, a key engine of China’s growth, surged 10.6% in March.
Markets expect the Federal Reserve to continue hiking rates at its next meeting, but central banks in Asia-Pacific are already hitting the brakes on rate increases — and some might even start cutting rates this year.
Samsung is reportedly considering switching from Google to Microsoft’s Bing as the default search engine on its phone. If the South Korean conglomerate carries through on its plan, Alphabet, Google’s parent, could lose billions of dollars in advertising. Alphabet sank 2.66% on the news.
PRO Higher interest rates helped big U.S. banks reap huge profits and revenue. But they’re hurting smaller banks like State Street, which fell short of earnings expectations. Here’s why rates affect those banks’ revenue differently.
China’s economy is rebounding on multiple fronts, according to data released Tuesday by the country’s National Bureau of Statistics. Last month, gross domestic product shot up, retail sales boomed, industrial output rose and fixed asset investment climbed.
Admittedly, some of those figures were lower than expected. Real estate investment declined, indicating China’s property sector is still a weak point in the country’s economy. Detractors can also point to China’s lower-than-expected 0.7% rise in March’s consumer price index, year on year, as a sign that consumption might not be as robust as retail sales suggest.
Indeed, the tepid reactions of stock markets on the mainland and in Hong Kong reinforce the idea that the red-hot numbers aren’t as significant as they initially seem.
Meanwhile, regional banks in the U.S. began reporting results Monday. It wasn’t the disaster many had feared, but it didn’t paint a picture of health in the sector, either.
First, the good news. Charles Schwab’s first-quarter net income rose 14% from a year ago to $1.6 billion, while its revenue increased 10% to $5.12 billion. Its revenue didn’t reach Wall Street’s estimate, but it’s pretty remarkable the bank (which also functions as a brokerage) managed to increase its profit despite being one of the hardest-hit financial institutions amid SVB’s collapse. Investors thought so too, pushing Charles Schwab shares 3.94% higher.
M&T Bank, a bank with assets of $201 billion (as of 2022), posted even better results. It beat first-quarter expectations on both the top and bottom lines, causing its stock to surge 7.78%.
But other banks didn’t fare as well. State Street, which is a custodian bank that holds financial assets like stocks and bonds, saw a 5% decline in first-quarter net income, to $549 million, even though its total revenue rose. The report made investors unload State Street stock, which plunged 9.18%.
Bank of New York Mellon, another large custody bank, sank 4.59% after State Street posted its earnings.
Earnings aside, all banks that reported Monday revealed a drop in deposits. Those at State Street and M&T shrank about 3%, while Charles Schwab saw an 11% drop in deposits from the prior quarter. However, when juxtaposed against the banks’ stock movement, it seems investors were more concerned about profitability than the size of deposits, which could be a promising signal that it’s back to business as usual in the sector.
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UNITED STATES – JUNE 30: Pedestrians pass by a Charles Schwab brokerage, in New York, Friday, June 30, 2006. (Photo by Stephen Hilger/Bloomberg via Getty Images)
Stephen Hilger | Bloomberg | Getty Images
This report is from today’s CNBC Daily Open, our new, international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.
Regional banks’ earnings reports weren’t a disaster, but neither were they a picture of health.
Samsung is reportedly considering switching from Google to Microsoft’s Bing as the default search engine on its phone. If the South Korean conglomerate carries through on its plan, Alphabet, Google’s parent, could lose billions of dollars in advertising. Alphabet sank 2.66% on the news.
PRO Higher interest rates helped big U.S. banks reap huge profits and revenue. But they’re hurting smaller banks like State Street, which fell short of earnings expectations. Here’s why rates affect those banks’ revenue differently.
Regional banks in the U.S. began reporting results Monday. It wasn’t the disaster many had feared, but it didn’t paint a picture of health in the sector, either.
First, the good news. Charles Schwab’s first-quarter net income rose 14% from a year ago to $1.6 billion, while its revenue increased 10% to $5.12 billion. Its revenue didn’t reach Wall Street’s estimate, but it’s pretty remarkable the bank (which also functions as a brokerage) managed to increase its profit despite being one of the hardest-hit financial institutions amid SVB’s collapse. Investors thought so too, pushing Charles Schwab shares 3.94% higher.
M&T Bank, a bank with assets of $201 billion (as of 2022), posted even better results. It beat first-quarter expectations on both the top and bottom lines, causing its stock to surge 7.78%.
But other banks didn’t fare as well. State Street, which is a custodian bank that holds financial assets like stocks and bonds, saw a 5% decline in first-quarter net income, to $549 million, even though its total revenue rose. The report made investors unload State Street stock, which plunged 9.18%.
Bank of New York Mellon, another large custody bank, sank 4.59% after State Street posted its earnings.
Earnings aside, all banks that reported Monday revealed a drop in deposits. Those at State Street and M&T shrank about 3%, while Charles Schwab saw an 11% drop in deposits from the prior quarter. However, when juxtaposed against the banks’ stock movement, it seems investors were more concerned about profitability than the size of deposits, which could be a promising signal that it’s back to business as usual in the sector.
The major U.S. indexes all rose, but only mildly. The S&P 500 added 0.33%, the Dow Jones Industrial Average 0.3% and the Nasdaq Composite rose 0.28%. Investors are still waiting for companies in other industries to report this week — some, like health care and communications, may disappoint investors, according to Sam Stovall, chief investment strategist at CFRA Research.
″It’s sort of a wait and see,” Stovall said, “because what the banks giveth, the rest of the market might taketh away.”
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Market Movers rounded up the best reactions from investors and analysts on Alphabet ‘s latest news. The experts, including Jim Cramer , discussed the tech giant as its shares fell 2.6%. The action followed a report in The New York Times that Samsung is considering a switch from Google to Microsoft’s Bing as its default search engine on its devices. Further, Morgan Stanley reiterated Alphabet as overweight and remained bullish on the stock heading into earnings next week. Alphabet is currently held in Jim Cramer’s Charitable Trust portfolio.
U.S. stocks just touched their highest levels in two months. Yet, signs of a looming selloff are piling up, according to Jonathan Krinsky, chief technical strategist at BTIG.
The S&P 500 SPX, +0.33%
and Russell 3000 RUA, +0.40%
are both trading just shy of their highs from mid-February, but market breadth hasn’t recovered, as index gains over the past month have largely relied on megacap names like Microsoft Corp. MSFT, +0.93%
and Apple Inc. AAPL, +0.01%
helping to offset weakness in other areas of the market.
As of Friday, only 45% of Russell 3000 stocks were trading above their 200-day moving averages, according to data cited by Krinsky. By comparison, when the broad-market gauge was trading at its highest level of 2023 back in February, 70% of the individual stocks included in the index were trading above their 200-day moving average. Technical analysts use moving averages as a gauge of a stock or index’s momentum.
BTIG
Lackluster breath is looking like more of an issue analysts say, especially now that the Nasdaq’s outperformance appears to be fading after leading markets higher since the start of the year.
Over the last two weeks, the Dow Jones Industrial Average DJIA, +0.30%
has outperformed the Nasdaq Composite COMP, +0.28%
by the widest margin since the two-week period ending Dec 30, according to FactSet data.
Krinsky cited exchange-traded funds that feature megacap technology names, including the iShares Expanded Tech-Software ETF IGV, +0.45%,
the Communications Services Select Sector SPDR Fund ETF XLC, -0.57%
and Consumer Discretionary Select Sector SPDR Fund ETF XLY, +0.71%,
as examples of emerging weakness in this critical sector of the market. Meanwhile, regional bank stocks, small-cap stocks and shares of retailers, all of which have lagged behind the market this year, look weak.
Krinsky summed up this dynamic thus: “The weak parts of the market remain weak, while the strong parts now appear vulnerable,” the BTIG analyst said in a Sunday note to clients.
Furthermore, “[i]n absolute and relative terms, the tech sector looks like a poor risk/reward to us here,” Krinsky added.
Low implied volatility is another issue for markets, Krinsky said. That can mean investors have gotten too complacent and markets may be heading for a selloff, analysts say.
The Cboe Volatility Index VIX, -0.41%,
otherwise known as Wall Street’s “fear gauge,” finished Friday at its lowest end-of-day level since Jan. 4, according to Dow Jones Market Data. The Cboe S&P 500 9-Day Volatility Index, which tracks implied volatility over a shorter time horizon, has also fallen to January lows, FactSet data show.
Such low levels mean volatility could be poised to “mean revert,” Krinsky said, which may portend a selloff in the months ahead for the S&P 500, the most liquid and most closely watched gauge of U.S. stock-market performance.
Implied volatility gauges measure activity in option contracts linked to the S&P 500 to gauge how volatile traders expect markets to be over the coming days and weeks. Typically, implied volatility advances when U.S. stocks are falling.
The greenback has shown some signs of life in recent sessions, although the U.S. dollar remains well below the multi decade highs it reached back in September. That the buck bounced off its February lows late last week suggests that momentum could be skewed toward the upside for the dollar, Krinsky said, which could create more problems for stocks given the dollar’s tendency to weigh on markets during 2022.
The ICE U.S. Dollar Index DXY, -0.43%,
a gauge of the dollar’s strength measured against a basket of rivals, was up 0.7% in recent trade at 102.22.
All of these factors support the notion that stocks could be headed for what Krinsky called the “reverse October playbook.”
BTIG
Just as the S&P 500 bottomed following the hotter-than-expected September report on consumer-price inflation, the market’s monthslong rebound rally may have peaked following last week’s CPI report for March, which showed consumer prices rose a scant 0.1% last month, less than the 0.2% increase that had been forecast by economists polled by MarketWatch.
Not everybody agrees with this assessment. Marko Papic, chief strategist at Clocktower Group, cited market data going back to 1934 to show that U.S. stocks tend to rally after inflation peaks. Consumer-price inflation reached its highest level in more than four decades when the CPI headline number showed prices up 9.1% year-over-year in June.
CLOCKTOWER GROUP
U.S. stocks look set to decline for a second day in a row on Monday, with the S&P 500 off 0.3% at 4,126, while the Nasdaq Composite was down by 0.4% at 12,070, and the Dow Jones Industrial Average traded marginally lower at 33,881.
Tesla CEO Elon Musk and his security detail depart the company’s local office in Washington, January 27, 2023.
Jonathan Ernst | Reuters
Tesla CEO Elon Musk is planning to launch an artificial intelligence startup that would go head-to-head with OpenAI, the Financial Times reported Friday.
Musk — the CEO of Tesla, SpaceX and Twitter — has been building a team of researchers and engineers and has been in conversation with multiple investors, the Financial Times reported, citing sources familiar with the matter. He has also reportedly been recruiting from other top AI firms, including Alphabet-owned DeepMind.
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“It’s real and they are excited about it,” a source familiar with the matter told the Financial Times.
Musk has secured thousands of Nvidia GPU processors, according to the report. Those chips are an integral part of building a large language model, or LLM, to compete with OpenAI’s GPT. Musk said he was acquiring the processors for his companies in a Twitter Spaces interview with the BBC this week.
“It seems like everyone and their dog is buying GPUs at this point,” Musk said. “Twitter and Tesla are certainly buying GPUs.”
Musk was once a major financial backer at OpenAI, committing $1 billion over multiple years, according to an earlier report from Semafor. But Musk backed out of his financial and operational commitments to the artificial intelligence firm at the same time OpenAI added a for-profit business segment. Microsoft invested $1 billion in OpenAI shortly after Musk ruptured with the group and, earlier this year, committed to a new multibillion-dollar investment.
Musk has publicly questioned ChatGPT-creator OpenAI’s approach. In March, Musk signed an open letter calling for an immediate, six-month-long halt on any research on AI models more advanced than OpenAI’s GPT-4. He has said AI is “one of the biggest risks to the future of civilization.”
Musk’s reported venture could become the latest entrant to an increasingly crowded space. Beyond Microsoft and Google, Amazonannounced Thursday that it’s entering the generative AI space.
Musk did not immediately respond to CNBC’s request for comment.
Here are Friday’s biggest calls on Wall Street: Bank of America reiterates Amazon as buy Bank of America said it’s standing by its buy rating on the stock. “Maintain Buy on Amazon. Three overhangs on stock have been retail margin cuts, AWS revenue deceleration, and potential TAM saturation. [Thursday’s] letter set a positive framework for discussion of these on the 1Q call.” UBS reiterates Netflix as neutral UBS said all eyes will be on the password sharing crackdown when Netflix reports earnings next week. “We expect 1Q to show continued progress toward re-accelerating growth. We believe subs will come in ahead of mgmt’s outlook for ‘modest’ adds, helped by a slower ramp for paid sharing (shifting potential churn into 2Q).” Goldman Sachs upgrades VF Corp to buy from sell Goldman said in its upgrade of the apparel and footwear company that it sees improved profitability. ” VFC’s revenue and earnings trajectory has underperformed the market, but we believe the stock is nearing an inflection point with the balance of catalysts for the stock now weighted to the upside.” Read more about this call here. Piper Sandler downgrades Rivian to neutral from overweight Piper said it still likes the electric vehicle company but that it needs more capital. “In order for RIVN to justify its cost structure, the company must spread its investment over millions of units (just like Tesla does), and in order to finance such aggressive expansion, RIVN will need capital.” Read more about this call here. Mizuho initiates ResMed as buy Mizuho initiated the medical device maker of sleeping machines like CPAP and says ResMed is the “undisputed king of sleep.” “Our Buy rating is based on: 1) positive feedback from our proprietary Sleep survey that points to healthy underlying US volumes, 2) lingering pent-up demand due to US staffing shortages.” UBS reiterates Amazon as buy UBS said it’s standing by its buy rating on the stock but came away from the company’s shareholder letter with less optimism on a “game-changing direction around margins.” ” AMZN’s annual shareholder letter, a defense of investment, underscored the company’s commitment to invest and the breadth of Amazon’s ambitions – from retail and AWS, to content, healthcare, satellite internet, int’l, grocery, and more. A lot to manage. We come away less optimistic on any game-changing direction around margins and still unsettled by a cloudy outlook at AWS.” Citi opens a negative catalyst watch on Harley-Davidson Citi said it sees “increasing credit loss metrics for Harley-Davidson. “Our recent analysis of both securitized receivable delinquencies and used motorcycle pricing point to fewer borrowers making monthly payments and lower recovery values once bikes are repossessed, a recipe for increasing credit loss metrics and eventually a higher loan loss reserve.” Oppenheimer reiterates PulteGroup as a top pick Oppenheimer said the stock is still a favorite idea citing “multiple expansion.” “We expect multiple expansion given a positive backdrop for builders broadly and because PHM likely will have the highest ROE in the space this year.” Cowen reiterates Alphabet as outperform Cowen said it’s bullish heading into Alphabet earnings later this month. “Our 1Q Digital ad expert check call on 4/6 suggests that a resilient US consumer helped drive GOOG 1Q23 Search spend growth near 4Q levels despite NT macro headwinds.” Cowen reiterates Nvidia as outperform Cowen said Nvidia is a leader in AI. ” NVIDIA continues to lead from the front across all the most important AI verticals. Expect continued momentum in results.” JPMorgan upgrades Hello Group to overweight from neutral JPMorgan said in its upgrade of the China messaging and social search company and says it sees a “recovery.” “We upgrade MOMO from N to OW (recovery in 2H23 with better social sentiment).” William Blair reiterates Charles Schwab as outperform William Blair said it’s standing by its outperform rating on the stock heading into earnings next week. “First-quarter results should indicate that earnings momentum is slowing as cash sorting continues. Sorting is reducing sweep cash, which Schwab is replacing to a degree with higher cost short-term funding.” Stifel resumes Kraft Heinz, General Mills and Mondelez as buy Stifel resumed coverage of several food stocks like Kraft Heinz, General Mills and Mondelez and says they are at an inflection point. “While investors remain generally cautious on Food stocks after a strong performance in 2022, we believe the margin inflection could be stronger than expected and elasticity should remain stable and low.” Wells Fargo reiterates Estee Lauder as overweight Wells kept its overweight rating on shares of Estee Lauder and said China cosmetics import data signals a return to growth. “With our data tracking in China improving, and following constructive results from LVMH, we think it’s reasonable to assume a turn in China is underway.” Bank of America reiterates PayPal as buy Bank of America said it’s standing by its buy rating on the stock heading into earnings in early May. “Given ongoing macro cross-currents, we think the most likely scenario is for PYPL to continue providing top-line guidance one quarter at a time.” Barclays reiterates Disney as equal weight Barclays said it sees slowing streaming growth heading into Disney earnings in early May. ” Disney and WBD are both in another strategy transition phase and focused on taking out costs from the streaming business.” Bernstein reiterates Boeing as outperform Bernstein said it’s standing by its outperform rating on the stock after it a 737Max parts issue surfaced on Thursday. “Yesterday it was disclosed that Spirit Aerosystems identified a manufacturing process issue with a fitting used to attach the vertical fin of the 737MAX to the fuselage.” Stifel reiterates Microsoft as buy Stifel said it’s standing by its buy rating on Microsoft heading into earnings later this month. “Looking forward, a year ago management provided its early FY23 double-digit top and bottom line commentary, but we expect a less granular forward guide focused on OPEX vs revenue growth given the ongoing uncertainties within the global economy.” DA Davidson reiterates Deere as buy DA Davidson said the ag equipment company is a “near term buy.” “Ethanol usage does appear stable in the near term, and the megatrends are likely to take 20+ years to play out, making DE a near-term BUY.”
A general view of Micron Technology’s building in Singapore, June 23, 2020.
Micron Gcm Studio | Reuters
Check out the companies making headlines in midday trading Monday.
Block — Shares of the payments stock lost 3% following a downgrade to market perform from outperform by KBW. The firm cited pressures from “‘small risks starting to add up,” including potential regulatory scrutiny of its Cash App business.
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Tesla — Shares of Elon Musk’s electric vehicle company fell more than 1.5% after the firm announced another price cut in the U.S., its fifth since the start of the year. The move came as tougher U.S. standards are set to reduce the $7,500 tax credit available for Tesla’s Model 3. The EV maker also said Sunday it will open a new Megafactory in Shanghai that is capable of producing 10,000 Megapacks — large batteries —a year.
Micron Technology — Micron Technology’s shares gained 8% after its rival Samsung Electronics announced that it plans to cut memory chip production in the near term. Many Wall Street analysts said the move could accelerate a return to supply-demand balance and potential rebound in the chipmaking sector. Chip giant Western Digital also added about 8%.
Excelerate Energy, EQT and other gas stocks — Shares of Excelerate Energy, EQT and other gas stocks ticked higher as natural gas futures climbed. Excelerate added more than 1%, while EQT jumped 3.7% and Matador Resources gained 2.9%. Excelerate also got a boost from a new Deutsche Bank report, wherein the firm initiated coverage of the stock, rated it a buy and said it was trading below its industry peers.
Apple, Google, Microsoft — Shares of major technology companies were in the red during Monday’s trading session. Apple’s stock price lost 2%, Google-parent Alphabet shed 2.8% and Microsoft lost 1.4%.
Taiwan Semiconductor — Shares of the chip giant dropped 2.2% in midday trading after the company saw a decline in monthly revenue for the first time in four years. The stock is still up roughly 17% from the start of the year. Last month, Bank of America upgraded its price target on the company, believing it stands to benefit from investor interest in generative artificial intelligence.
New Fortress Energy — The stock gained 4% after Deutsche Bank initiated New Fortress as a buy. The bank said the company is well positioned in the liquified natural gas sector, which it believes has “potential to create outsized investment opportunities.”
Nikola — Shares fell 3% after Evercore ISI reiterated its in line rating. The firm also cut its price target in half to $1, saying the company has too many headwinds.
Five Below — Shares of the discount retailer gained 3.9% after Roth MKM said that Five Below might be helped by the success of “The Super Mario Bros. Movie,” which reported stronger-than-anticipated box office results.
AMC Entertainment, IMAX, Cinemark Holdings — Shares of major theater chains were in the green on Monday after the box office success of “The Super Mario Bros. Movie,” which was made by Universal Pictures. AMC’s stock price popped 6.7%, IMAX soared by 2% and Cinemark gained 5.7%.
— CNBC’s Jesse Pound, Hakyung Kim, Samantha Subin, Yun Li, Alex Harring and Brian Evans contributed reporting
Disclosure: Comcast is the parent company of NBCUniversal and CNBC. NBCUniversal is the distributor of “The Super Mario Bros. Movie.”
If you’ve heard a lot of pro-A.I. chatter in recent days, you’re probably not alone.
AI developers, prominent A.I. ethicists and even Microsoft co-founder Bill Gates have spent the past week defending their work. That’s in response to an open letter published last week by the Future of Life Institute, signed by Tesla CEO Elon Musk and Apple co-founder Steve Wozniak, calling for a six-month halt to work on AI systems that can compete with human-level intelligence.
The letter, which now has more than 13,500 signatures, expressed fear that the “dangerous race” to develop programs like OpenAI’s ChatGPT, Microsoft’s Bing AI chatbot and Alphabet’s Bard could have negative consequences if left unchecked, from widespread disinformation to the ceding of human jobs to machines.
But large swaths of the tech industry, including at least one of its biggest luminaries, are pushing back.
“I don’t think asking one particular group to pause solves the challenges,” Gates told Reuters on Monday. A pause would be difficult to enforce across a global industry, Gates added — though he agreed that the industry needs more research to “identify the tricky areas.”
That’s what makes the debate interesting, experts say: The open letter may cite some legitimate concerns, but its proposed solution seems impossible to achieve.
Here’s why, and what could happen next — from government regulations to any potential robot uprising.
The open letter’s concerns are relatively straightforward: “Recent months have seen A.I. labs locked in an out-of-control race to develop and deploy ever more powerful digital minds that no one — not even their creators — can understand, predict, or reliably control.”
And it’s easy to imagine companies trying to save money by replacing human jobs — from personal assistants to customer service representatives — with A.I. language systems.
In the U.S., some members of Congress have called for new laws to regulate A.I. technology. Last month, the Federal Trade Commission issued guidance for businesses developing such chatbots, implying that the federal government is keeping a close eye on AI systems that can be used by fraudsters.
And multiple state privacy laws passed last year aim to force companies to disclose when and how their A.I. products work, and give customers a chance to opt out of providing personal data for A.I.-automated decisions.
Those laws are currently active in California, Connecticut, Colorado, Utah and Virginia.
At least one A.I. safety and research company isn’t worried yet: Current technologies don’t “pose an imminent concern,” San Francisco-based Anthropic wrote in a blog post last month.
Anthropic, which received a $400 million investment from Alphabet in February, does have its own A.I. chatbot. It noted in its blog post that future A.I. systems could become “much more powerful” over the next decade, and building guardrails now could “help reduce risks” down the road.
The problem: Nobody’s quite sure what those guardrails could or should look like, Anthropic wrote.
The open letter’s ability to prompt conversation around the topic is useful, a company spokesperson tells CNBC Make It. The spokesperson didn’t specify whether Anthropic would support a six-month pause.
In a Wednesday tweet, OpenAI CEO Sam Altman acknowledged that “an effective global regulatory framework including democratic governance” and “sufficient coordination” among leading artificial general intelligence (AGI) companies could help.
But Altman, whose Microsoft-funded company makes ChatGPT and helped develop Bing’s AI chatbot, didn’t specify what those policies might entail, or respond to CNBC Make It’s request for comment on the open letter.
Some researchers raise another issue: Pausing research could stifle progress in a fast-moving industry, and allow authoritarian countries developing their own A.I. systems to get ahead.
Highlighting A.I.’s potential threats could encourage bad actors to embrace the technology for nefarious purposes, says Richard Socher, an A.I. researcher and CEO of A.I.-backed search engine startup You.com.
Exaggerating the immediacy of those threats also feeds unnecessary hysteria around the topic, Socher says. The open letter’s proposals are “impossible to enforce, and it tackles the problem on the wrong level,” he adds.
The muted response to the open letter from A.I. developers seems to indicate that the tech giants and startups alike are unlikely to voluntarily halt their work.
The letter’s call for increased government regulation appears more likely, especially since lawmakers in the U.S. and Europe are already pushing for transparency from A.I. developers.
In the U.S., the FTC could also establish rules requiring A.I. developers to only train new systems with data sets that don’t include misinformation or implicit bias, and to increase testing of those products before and after they’re released to the public, according to a December advisory from law firm Alston & Bird.
Such efforts need to be in place before the tech advances any further, says Stuart Russell, a Berkeley University computer scientist and leading A.I. researcher who co-signed the open letter.
A pause could also give tech companies more time to prove that their advanced AI systems don’t “present an undue risk,” Russell told CNN on Saturday.
Both sides do seem to agree on one thing: The worst-case scenarios of rapid A.I. development are worth preventing. In the short term, that means providing A.I. product users with transparency, and protecting them from scammers.
In the long term, that could mean keeping A.I. systems from surpassing human-level intelligence, and maintaining an ability to control it effectively.
“Once you start to make machines that are rivaling and surpassing humans with intelligence, it’s going to be very difficult for us to survive,” Gates told the BBC back in 2015. “It’s just an inevitability.”
When Microsoft first invested $1 billion in OpenAI in 2019, the deal received no more attention than your average corporate venture round. The startup market was blazing hot, and artificial intelligence was one of many areas attracting mega-valuations, alongside electric vehicles, advanced logistics and aerospace.
Three years later, the market looks very different.
Startup funding has cratered following the collapse of public market multiples for high-growth, money-losing tech companies. The exception is artificial intelligence, specifically generative AI, which refers to technologies focused on producing automated text, visual and audio responses.
No private company is hotter than OpenAI. In November, the San Francisco-based startup introduced ChatGPT, a chatbot that went viral thanks to its ability to craft human-like replies to users’ queries about nearly any topic.
Microsoft’s once under-the-radar investment is now a major topic of discussion, both in venture circles and among public shareholders, who are trying to figure out what it means to the potential value of their stock. Microsoft’s cumulative investment in OpenAI has reportedly swelled to $13 billion and the startup’s valuation has hit roughly $29 billion.
That’s because Microsoft isn’t just opening up its fat wallet for OpenAI. It’s also the arms dealer, as the exclusive provider of computing power for OpenAI’s research, products and programming interfaces for developers. Startups and multinational companies, including Microsoft, are rushing to integrate their products with OpenAI, which means massive workloads running on Microsoft’s cloud servers.
Microsoft is integrating the technology into its Bing search engine, sales and marketing software, GitHub coding tools, Microsoft 365 productivity bundle and Azure cloud. Michael Turrin, an analyst at Wells Fargo, says it could all add up to over $30 billion in new annual revenue for Microsoft, with roughly half coming from Azure.
What does that mean for Microsoft’s investment and broader arrangement?
“It’s so good that I have investors asking me how they pulled it off, or why OpenAI would even do this,” Turrin said in an interview.
However, the financial implications are anything but straightforward.
OpenAI was founded in 2015 as a nonprofit. The structure changed in 2019, when two top executives published a blog post announcing the formation of a “capped-profit” entity called OpenAI LP. The current setup restricts the startup’s first investors from making more than 100 times their money, with lower returns for later investors, such as Microsoft.
After Microsoft’s investment is paid back, it will receive a percentage of OpenAI LP’s profits up to the agreed-upon cap, with the rest flowing to the nonprofit body, an OpenAI spokesperson said. A Microsoft spokesperson declined to comment.
Greg Brockman, an OpenAI co-founder and one of the blog post’s authors, wrote in a 2019 Reddit comment that, for investors, the system “feels commensurate with what they could make investing in a pretty successful startup (but less than what they’d get investing in the most successful startups of all time!).”
It’s an unfamiliar model in Silicon Valley, where maximizing returns has long been the priority of the venture community. Nor does it make much sense to Elon Musk, who was one of OpenAI’s founders and early backers. Several times this year, Musk has tweeted his concerns about OpenAI’s unconventional structure and its implications for AI, particularly given Microsoft’s level of ownership.
“OpenAI was created as an open source (which is why I named it ‘Open’ AI), non-profit company to serve as a counterweight to Google, but now it has become a closed source, maximum-profit company effectively controlled by Microsoft,” Musk tweeted in February. “Not what I intended at all.”
Brockman said on Reddit that if OpenAI succeeds, it could “create orders of magnitude more value than any company has to date.” As a major OpenAI investor, Microsoft would benefit.
Aside from its investment, leaning on OpenAI has the potential to help Microsoft dramatically reverse its fortunes in AI, where it’s stumbled publicly and didn’t build a meaningful business on its own. Microsoft pulled the Clippy assistant from Word, Cortana from the Windows taskbar and its Tay chatbot from Twitter.
Unlike areas such as advertising or security, Microsoft hasn’t disclosed the scale of its AI business, though CEO Satya Nadella said in October that revenue from its Azure Machine Learning service had doubled for four consecutive quarters.
If nothing else, the work with OpenAI has given Nadella bragging rights. Here’s what he said at Microsoft’s annual shareholder meeting in December, a month after ChatGPT was launched:
“When I think about Azure, one of the things that we have done, in fact, in the context of even ChatGPT, which today is one of the more popular AI applications out there, guess what? It’s all trained on the Azure supercomputer.”
In February, Microsoft held a press event at its headquarters in Redmond, Washington, to announce new AI-powered updates to its Bing search engine and Edge browser. Altman was one of the featured speakers.
It’s been a bumpy ride since then, as the Bing chatbot has held some highly publicized and creepy conversations with users, and it also served up some incorrect answers at the launch. Somewhat fortunately for Microsoft, Google’s rollout of its rival Bard AI service was underwhelming, leading employees to describe it as “rushed” and “botched.”
Despite the early hiccups, the enthusiasm for new technologies based on large language models, or LLMs, is palpable across the tech industry.
At the core of OpenAI’s bot is an LLM called GPT-4 that’s learned to compose natural-sounding text after being trained on extensive online information sources. Microsoft has an exclusive license on GPT-4 and all other OpenAI models, the OpenAI spokesperson said.
There are plenty other LLMs available.
Last month, Google said it had given some developers early access to an LLM called PaLM.
Startups AI21 Labs, Aleph Alpha and Cohere offer their own LLMs, as does Google-backed Anthropic, which has picked Google as its “preferred” cloud provider. Like Altman and Musk, Anthropic cofounder Dario Amodei, who was previously vice president of research at OpenAI, has expressed concerns about the unbridled power of AI.
In 2021, Anthropic registered in Delaware as a public-benefit corporation, signifying an intention to have a positive impact on society even as it pursues profits.
“We were and are focused on developing innovative structures to provide incentives for safe development and deployment of AI systems and will have more to share on this in the future,” an Anthropic spokesperson told CNBC in an email.
Across the industry, one thing is clear: it’s early days.
Quinn Slack, CEO of code-search startup Sourcegraph, said he hasn’t seen proof that the OpenAI partnership has given Microsoft a notable advantage, even though he called OpenAI the top LLM provider.
“I don’t think people should look at Microsoft and say they’ve totally locked up OpenAI and OpenAI is doing their bidding,” Slack said. “I truly believe people there are motivated to build amazing technology and make it as widely used as possible. They view Microsoft as a great customer but not someone that’s controlling. That’s good, and I hope it stays that way.”
OpenAI has plenty of skeptics. Late last month the nonprofit Center for Artificial Intelligence and Digital Policy called on the Federal Trade Commission to stop OpenAI from releasing new commercial releases of GPT-4, describing the technology as “biased, deceptive, and a risk to privacy and public safety.”
When considering potential exits for OpenAI, Microsoft — which does not hold an OpenAI board seat — would be the natural acquirer given its close entanglement. But that sort of deal would likely attract regulatory scrutiny, because of concerns about AI and about Microsoft stifling competition. By remaining an investor and not becoming OpenAI’s owner, Microsoft could avoid Hart-Scott-Rodino reviews from U.S. competition regulators.
“I’ve gone through it. It’s painful,” said David Zilberman, a partner at Norwest Venture Partners.
Based on its existing valuation, the more probable path for OpenAI is an eventual IPO, said Scott Raney, a managing director at Redpoint Ventures.
According to PitchBook data, OpenAI is on pace to generate $200 million in revenue this year, up 150% from 2022, and then $1 billion in 2024, which would imply 400% growth.
“When you raise at a $30 billion valuation, it’s kind of like, there’s no turning back at that point,” Raney said. You’re saying, “Our plan is to be a big independent standalone company.”
OpenAI’s spokesperson said there are no plans to go public or get acquired.
High-profile tech and media executives shared their experiences of working in and competing with China with lawmakers who visited California this week.
A delegation of about 10 members of the House Select Committee on the Strategic Competition Between the United States and the Chinese Communist Party made the trip west to meet with industry leaders and subject matter experts about key areas of concern when it comes to dealing with China.
Over the three-day trip that kicked off on Wednesday, lawmakers were scheduled to meet with Disney CEO Bob Iger and Apple CEO Tim Cook, as well as high-level executives from Google, Microsoft, Palantir and Scale AI. Also on the agenda were events with a group of producers, screenwriters and former studio executives who have experience working with China, as well as with venture capitalists and Stanford University experts, according to a source close to the committee.
The trip highlights the key role tech and media industries play in America’s increasingly complex relationship with China. While these industries often rely on the massive audiences and workforces available in China, dependence on the country raises concerns of human rights and free speech issues because of the government’s censorship controls, as well as supply chain risks.
The trip comes on the heels of a historic meeting in California between House Speaker Kevin McCarthy, R-Calif., and Taiwanese President Tsai Ing-wen on Wednesday. That meeting, which former Speaker Nancy Pelosi, D-Calif., also praised, enraged the leadership of the Chinese Communist Party. The Chinese government called the meeting a “provocation” and promised “resolute actions.”
In Hollywood, the group of lawmakers from the select committee learned about a range of topics related to competition with China. In a meeting with Disney’s Iger and later at a dinner with unnamed studio executives, censorship of creative content was a big focus, according to the source familiar with the committee’s activities. Executives discussed dealing with self-censorship to try to ensure a movie won’t offend the Chinese government even before filming begins, as well as edit requests they receive from the government in order to show films in the country.
In Silicon Valley on Thursday, according to the source, Microsoft President Brad Smith gave a presentation about artificial intelligence, warning that there is a narrow gap between the U.S. and China in the development of generative AI, which has been made popular by tools such as ChatGPT. He also discussed rare earth mineral mining and processing, which make up key components in certain tech devices. Smith and executives from Google, Palantir and ScaleAI attended a luncheon with committee members.
Lawmakers also met with experts from Stanford University, including those from the Gordian Knot Center for National Security Innovation, according to center founding member Steve Blank. In a phone call following the discussion Thursday, Blank said he communicated the need for a defense strategy that involves more public-private partnerships across different industries to get the U.S. up to speed with China. Blank said he was impressed by the bipartisanship and interest he saw from lawmakers in attendance.
“In general, the questions they asked, you would have been very proud to be an American sitting in that room,” Blank said. “They were bipartisan, and they were to the point and they were very smart. These people understand the issues, and they’re trying to help the country be better.”
Rep. Ro Khanna, D-Calif., a committee member who represents Silicon Valley, told CNBC in a phone interview ahead of the trip on Tuesday that he was excited for his colleagues to visit his home district. Khanna said it’s always valuable for lawmakers to spend time learning about cutting-edge technologies such as AI, quantum computing and climate tech to better understand how to both regulate and foster it.
“I think it would be wise for every member of Congress to spend a week in Silicon Valley,” Khanna said. “Technology is going to define so many fields from the economy to national security to our issues of citizenship, and we need people to be immersed in it, at least understanding it.”
Khanna and others have described the purpose of the trip as primarily a fact-finding mission. While the conversations will likely inform future policymaking and hearings, lawmakers entered the meetings aiming to learn from industry executives on the ground.
The group was also slated to meet with venture capitalists on Thursday, including Andreessen Horowitz, Khosla Ventures and SV Angel. Khanna expected the VCs would discuss how the government could “better collaborate with the private sector” to stay ahead of China in key areas of emerging technology.
On Friday, lawmakers were set to discuss cryptocurrency with experts at Stanford before traveling to Cupertino to meet with Cook at Apple’s headquarters, according to the source familiar with the committee’s plans.
Khanna said he anticipated the business leaders would inform the policymakers of any progress they’ve made in diversifying their supply chains out of China and how they use export revenue from China to invest in the U.S. When it comes to the meeting with Apple’s CEO, Khanna said he expected Cook would “speak candidly about the supply chain issues,” including the complexities and progress of diversifying production outside of China.
In a phone interview partway through the trip on Thursday, Rep. Haley Stevens, D-Mich., said she saw common themes between the sorts of challenges the tech and media industries face when it comes to China and those facing the automotive industry in her home state.
“Every meeting we’ve been in, in my opinion, has related back to Michigan’s economy and our ability to manufacture as a country,” Stevens said. “One of the themes that I came into the committee with as a manufacturing champion and as someone who understands the interrelatedness between manufacturing and tech is: What else do we need to do to incentivize and grow industrial policy in the United States of America?” Stevens said. She pointed to the passage of the Chips and Science Act as an example of incentivizing domestic semiconductor manufacturing.
“Now, we’re looking at other areas specific to supply chain vulnerabilities and weaknesses that are going to impact our economy and, aside from chips, we want to be competitive in quantum and artificial intelligence,” Stevens said.
