Artificial Intelligence (AI) is increasingly in the spotlight, attracting widespread attention across industries. One question on investors’ minds is how AI will change investment dynamics. In this context, Reference [1] examines whether AI and passive investing weaken the relationship between stock returns and economic fundamentals while increasing return autocorrelation.
The study analyzes 12 Fama-French U.S. industry portfolios using quarterly data from 2002 Q1 to 2025 Q2, comprising 1,128 industry-quarter observations. To measure AI sentiment, the author uses NVIDIA’s excess returns over the S&P 500, detrended and standardized.
The paper pointed out,
Five findings stand out. First, AI intensity exerts a robust negative effect on quarterly industry returns, acting as a sectoral redistributive force that diverts capital from non-AI segments during sentiment spikes – consistent with Danielsson and Uthemann’s (2025) prediction of intensified procyclical, synchronised capital behaviour – without directly severing the informational relationship between prices and economic activity. Second, fundamental anchoring persists over the full 2002–2025 period but is weakening. Industrial production growth retains its role as a positive and significant predictor of industry returns, although rolling-window and split-sample analyses reveal a sustained deterioration from 2015 Q2 that intensifies in the post-COVID era. Third, no evidence of feedback dynamics emerges: the lagged-return coefficient fails to attain statistical significance throughout the sample and across both sub-periods, providing no support for the market-fragility hypothesis and aligning instead with informationally efficient pricing. Fourth, passive investing flows exert no direct effect on returns, suggesting their influence operates through indirect structural channels–factor exposure, amplified comovement, and liquidity transformation– in line with the microstructure mechanisms identified by Ben-David et al. (2018) and Da and Shive (2018). Fifth, aggregate market returns remain the dominant driver of industry variation, a pattern that neither AI sentiment nor passive growth has yet materially altered.
In short, the paper finds that when AI-related stocks perform particularly well, other industries tend to underperform. This suggests that investors may be shifting capital toward AI companies and away from traditional sectors. The study also finds that stock returns have become less closely linked to economic fundamentals since 2015, although the evidence of this weakening is relatively modest.
This paper contributes to an emerging body of research on the impact of AI on investing, although its real-world effects remain to be seen.
An interesting aspect of the study is its use of NVIDIA’s relative performance as a proxy for AI sentiment. Trading system developers could adopt a similar approach by incorporating similar AI-related variables into investment models.
Let us know what you think in the comments below or in the discussion forum.
References
[1] Piscopiello, M. (2026). Artificial Intelligence, Price Anchoring, and Feedback Dynamics in U.S. Equity Markets, Kent Economics Undergraduate Research Journal, Issue 4.
Post Source Here: How AI and Passive Investing Affect Stock Market Behavior
source https://harbourfronts.com/ai-passive-investing-affect-stock-market-behavior/
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