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Using AI to Beat the Market
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Most investors, whether amateur or professional, struggle to beat the market. Despite this, they continue to seek ways to outperform indices like the S&P 500. Human behavior, driven by fear and greed, often results in impulsive, poorly timed investment decisions. As a solution, some investors are turning to artificial intelligence (AI) for help in making more objective stock picks.
AI is the latest tool being marketed to both retail and institutional investors. Companies have developed AI-powered platforms that claim to offer stock-picking capabilities with the potential to outperform major indices like the S&P 500.
While these claims are ambitious, and results so far have been mixed, the technology offers investors a way to sift through vast amounts of data quickly and efficiently, taking the guesswork out of stock selection.
The Challenges of Beating the Market
Even seasoned investors, including hedge fund managers, find it difficult to consistently outperform the market.
For example, a 2020 study by S&P Dow Jones Indices found that 89% of actively managed funds underperformed the S&P 500. More recently, hedge funds returned an average of 6.67% in 2023, compared to the S&P 500's impressive 24% return. This disparity underscores the challenges of active investing and highlights the appeal of passive strategies like index funds, which have become popular with retail investors and professional traders alike.
Despite the popularity of passive investing, some investors are still captivated by the allure of outsized gains. For those unwilling to choose their own stocks but still looking for market-beating returns, AI may present a compelling alternative.
AI in Stock Picking: What Can It Do?
While popular AI tools like OpenAI’s ChatGPT and Alphabet’s Gemini are highly advanced, they are not designed for stock picking. When queried about investments, these language models typically offer general guidance rather than specific stock recommendations. However, there are specialized AI platforms too, such as Danelfin and Boosted.ai are engineered specifically to analyze and recommend stocks and exchange-traded funds (ETFs).
These platforms provide investors with a way to bypass the time-consuming task of financial research and analysis.
Danelfin, for instance, uses a combination of technical, fundamental, and sentiment indicators to assign stocks a score between 1 and 10. The higher the score, the greater the probability that the stock will outperform the market in the short term, typically over a three-month period. However, AI tools like these are not infallible, and investors must still evaluate whether the results align with their investment goals.
The Role of AI During Market Volatility
The true test for AI-driven stock-picking platforms will come during periods of economic downturn. As Andrew J. Evans, CEO of Rossby Financial, points out, AI’s predictive capabilities are likely to be most valuable when the market is not in a prolonged bull run.
“Where [AI] will prove its mettle is the next bear market,” he says. While the S&P 500 has been in a bull run since late 2023, the next downturn could reveal the strength—or limitations—of these AI tools.
Evans also emphasizes that while AI can enhance predictive accuracy, it is not foolproof. The technology relies on historical data and patterns, but it cannot foresee market shocks or sudden economic changes.
For now, investors should view AI as an aid in decision-making rather than a replacement for human judgment.
AI Tools for Investors: Some AI Stock Prediction Tools
EquBot, an AI-powered stock trading tool that uses natural language processing and machine learning to analyze market data, including news and social media sentiment. It offers features like sentiment analysis, trend identification, and custom watchlists, helping traders make informed decisions. While its 24/7 automated trading and AI-driven insights are beneficial, high subscription fees and occasional analytical errors are potential drawbacks.
Danelfin, which aims to democratize stock-picking technology that was once only available to professional traders. The platform provides users with stock and ETF ratings, along with an easy-to-understand score, allowing investors to make informed decisions based on AI-generated predictions.
Trade Ideas, an AI-driven platform that uses cloud computing to identify stock trading opportunities by analyzing large volumes of data for unusual market behavior. Its features include spotting bullish and bearish patterns, ranking stocks by potential opportunity, and providing real-time trading alerts. While Trade Ideas offers a powerful stock screener with extensive customization options, it can be complex for new investors and comes with high subscription costs.
TrendSpider, an AI-powered tool for stock trading and price prediction, using an advanced AI engine to analyze charts and technical indicators. It generates automated trade signals tailored to individual strategies, examining custom indicators for buy and sell signals and identifying reversal and continuation patterns. TrendSpider’s strengths lie in its automated chart analysis and customizable scans, offering users tailored insights based on price and volume patterns. However, it has a steep learning curve and offers fewer technical indicators than some competitors.
Boosted.ai, suitable for institutional investors. Boosted Insights, the company’s AI platform, helps professional traders improve portfolio performance by streamlining the research process. With clients managing assets worth over $1 trillion, Boosted.ai’s influence in the institutional space is growing rapidly.
AI Stock Picks: A Work in Progress
Despite the potential of AI to revolutionize stock picking, results so far have been inconsistent. Danelfin’s AI, for example, predicted that shares of 3M would reach $145 to $208 between April and July 2023. In reality, the stock peaked at around $110, a modest 5% gain that fell short of the AI’s projections. While such missteps illustrate the limitations of AI, it’s worth noting that long-term investors holding 3M stock have since seen gains of nearly 22%.
The mixed results suggest that AI-powered platforms should not be relied upon exclusively for investment decisions. Instead, they are best used as a complement to traditional investment strategies. Investors must still exercise discretion, understanding how and why AI delivers certain recommendations.
Conclusion: Can AI Beat the Market?
AI has the potential to become a powerful tool in stock picking, but it is not a guaranteed way to beat the market. The technology can provide valuable insights, streamline research, and help investors make more informed decisions, but it cannot eliminate risk. As Evans points out, AI won’t turn the average investor into Warren Buffett, but it can help people appreciate the investment process more.
In the coming years, AI’s role in the financial world will likely expand, offering both retail and institutional investors new ways to navigate the complexities of the market. For now, AI-assisted investing tools are a promising but evolving resource—one that requires careful consideration and a healthy dose of human oversight.
AI Stock Pick of the Week: Banco Macro
AI gave Banco Macro a Buy rating with a target price of $92.89. This rating was driven by multiple factors, including the stock being undervalued. Alongside, the company's improved financial performance and a positive business outlook also contributed to the favorable outlook.
Similarly, Banco Macro (BMA) earned a strong AI score of 9 out of 10 (Buy) based on AI’s analysis, which suggests a +6.25% likelihood of beating the market (S&P 500) over the next three months.
Remember the average price target is $87.42 with a high forecast of $108 and a low forecast of $64.
This probability reflects a comparison between the market’s average outperform probability (35.61%) and BMA’s own, which stands at 41.86%. This data-driven insight highlights BMA’s potential for short-term market gains.
Note: These AI picks are gathered using a number of AI tools and sources.
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Nothing in this newsletter is financial advice. Always do your own research and think for yourself.