Irony Alert: A.I. Robot Issues Punishing Economic Forecast for Leading “Creators”
Like most industries, Wall Street isn’t immune to the creeping encroachment of artificial intelligence (A.I.). But in an ironic twist, the first generation of machines might do investment banks more harm than good, should investors heed their advice. “AIERA,” the new A.I. equity research robo-analyst brainchild of Wells Fargo & Co (NYSE:WFC), has quantum-crunched the numbers, and its initial economic forecast is scathing.
AIERA just placed 11 equity ratings on “Hold.” But that’s not the best part. AIERA also went so far as to slap Alphabet Inc (NASDAQ:GOOG), the parent company of Google, and Facebook Inc (NASDAQ:FB) with “Sell” ratings. (Source: “New Robot Analyst Slaps Sell Rating on Facebook and Google,” Bloomberg Technology, October 6, 2017.)
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By doing so, AIERA has broken the No. 1 unwritten rule on Wall Street: Never tag “elite” companies with the dreaded “S” moniker. Even devoid of business connections, “Sell” ratings don’t make good advertising slogans for existing and potential clients. Clients expect positive analyst coverage, even when solid investment cases are hard to come by.
Case in point: In December 2016, a study of all equity analyst ratings for the S&P 500 was conducted. Half of the entire index (49%) was rated “Buy” or “Outperform,” 45% were rated as “Hold” or “Neutral,” and only six percent were rated as “Sell” or “Underperform.” Yet, about half the S&P 500 underperformed the overall index in 2016, with 30% generating negative overall returns on the year. (Source: “New Robot Equity Analyst Hits Facebook And Google With A Sell Rating,” Zero Hedge, October 6, 2017.)
So as we can see, human ratings are full of bias and misdirection. It’s hard to speak ill of the client paying you millions to make a great investment case. Which is what makes AIERA’s sell recommendation on Big Tech so troubling. AIERA isn’t subject to pressure or repercussion from superiors. It’s simply a super algorithm that interprets massive data sets to deliver a logical conclusion. And that conclusion is too sell the biggest investment darlings on Wall Street.
Analyst Ratings Alphabet Inc
| 3 Months Ago | 1 Month Ago | Current | |
|---|---|---|---|
| Buy |
34
|
35
|
35
|
| Overweight |
4
|
4
|
4
|
| Hold |
5
|
5
|
5
|
| Underweight |
0
|
0
|
0
|
| Sell |
1
|
0
|
0
|
(Source: “Alphabet Inc. Cl C,” The Wall Street Journal, last accessed October 10, 2017.)
Predictably, Wells Fargo attempted to walk back the damage. It claimed AIERA was still in “test and learn mode,” and reiterated its human-based economic forecast of $215.00/share for Facebook and $1,250/share for Google. It might be the first documented case where artificial intelligence was thrown under the bus. After all, it couldn’t let a silly invention like AIERA drive away lucrative Silicon Valley business, could it?
Despite this faux pas, automation on Wall Street is here to stay. Such inventions have become an open secret, as plummeting mutual fund, research, and trading revenues have forced investment banks to cut costs and lower fees. Robo-analysts and advisors further eliminate the disadvantage emotion plays in costly investing/analysis miscalculations.
Ultimately, that upside will be too tempting to pass up. Even if it’s a little too honest at times.
