Market Trends to Watch in 2023
Here are some of the Trends that we believe will be important to monitor in 2023 and beyond. Davidson Investment Advisors puts this piece together annually; it is-meant to provide some insight into exciting, disruptive, or otherwise new developments we anticipate to be impactful to businesses, consumers, and society. You may notice that some of our discussions are follow-on and reference past years’ trend pieces. Perhaps that’s a good sign that we have indeed identified trends.
WONDER DRUG? (GLP-1s)
Obesity is one of the most significant health challenges around the world. Biopharma company Novo Nordisk estimates more than 750 million people globally are living with obesity, which not only contributes to higher mortality, but also to more than 200 related health complications. Weight management drugs have been studied for decades with very little success until Novo Nordisk launched its GLP-1 (glucagon-like peptide-1) drug, Ozempic, for Type 2 diabetes in 2021. This class of drugs limits the amount of sugar that the liver releases into the bloodstream and slows down how long food stays in the stomach. GLP-1 drugs contribute to weight loss by suppressing appetite and making you feel full sooner when you eat. Ozempic and other approved GLP-1 drugs such as Wegovy (Novo Nordisk) and Mounjaro (Eli Lilly) are seeing patients typically lose 15-22.5% of their body weight.
While losing weight is a great benefit of using these drugs, recent studies show health benefits outside of diabetes and weight management. Most notably was the SELECT trial in August 2023 which demonstrated that patients on Wegovy had a 20% lower incidence of heart attack, stroke, or death from heart disease.
Other benefits that patients observe include a reduction in addictive behaviors from alcohol to smoking to even nail biting. The promise of a wonder drug such as GLP-1 could dramatically change the healthcare landscape and society as a whole, potentially making as much as 70% of the U.S. population healthier and significantly more productive.
Long-term studies of GLP-1s are ongoing regarding potential negative side-effects, and there remain major issues regarding the cost and affordability of such drugs. While cost is indeed a factor, GLP-1s could have a transformative impact on our society and economy beyond just losing a few pounds.
MULTI MODDAL AI
In November of 2022, ChatGPT (Trends 2023) captured the imagination of the public and offered a glimpse of what was possible with generative artificial intelligence (GenAI). Since then, it has been a race to invest and gain advantage. While the viral “blue duck” video introducing Gemini by Google DeepMind risked overselling the technology, multimodal AI will be an important evolution for artificial intelligence. Multimodal AI is artificial intelligence that
combines multiple types (or modes) of data input that make it possible to generate more insightful or nuanced conclusions about real-world questions. Until now, most AI systems have been unimodal, designed and trained to work with one type of data exclusively and tuned for that modality. For example, the original ChatGPT uses natural language processing (NLP) algorithms to extract meaning from text content and produce a text- only output. Multimodal AI, instead, accepts and processes data from multiple sources, including images, video, speech, sound, as well as code and text. Multiple inputs allow for a more detailed, refined assessment of a particular environment or given situation. A multimodal NLP, for example, may identify signs of emotion in a user’s voice and combine that with facial expressions to better interpret a query and tailor a proper response. In this way, multimodal AI more closely resembles human perception.
Multimodal AI will be central to the development of autonomous vehicles (Passenger Economy, Trends 2018) and robotics (Rise of the Machines, Trends 2014) that need to interact with real-world environments. Multimodal AI uses data from cameras, microphones, GPS, radar, LiDAR, and a host of other sensors to better understand and more successfully interact with its surroundings. Likewise, multimodal AI will enable more effective and intuitive human-computer interaction through the use of sensors and wearables (XR, Trends 2023) that may even extend to the Metaverse (Trends 2022).
SMART CHEMO (ADCs)
The idea of targeted chemotherapy was first conceptualized by a German scientist, Paul Ehrlich, over a century ago. He imagined it could be possible to kill specific harmful microbes or unwanted cells, with what he would call a “magic bullet”, without harming the body itself. His discovery of Salvarsan for the treatment of syphilis in 1909 is considered his first “magic bullet” and led to the foundation of the concept of chemotherapy, a term he also coined.
Antibody-drug conjugates (ADCs) are a rapidly emerging class of therapeutic agents that combine the highly specific targeting of monoclonal antibodies (mAbs) with the lethal effect of cytotoxic cellular poison. Cancer researchers today develop these “smart bomb” ADCs to target tumors with drugs while leaving healthy body cells intact. With such treatment, patients will suffer fewer side-effects from the toxic drugs used in chemotherapy. The first ADC drug, called Mylotarg (gemtuzumab ozogamicin), was approved by the FDA in 2000 for a form of leukemia. However, it has taken 10-20 years to perfect the construction of the “biological smart bomb” to better enable it to target common solid tumors which are more complex and difficult to penetrate. As the technology advances further, the promise of Precision Medicine (Trends 2016) and personalized ADCs may be a possibility in the future. Morgan Stanley Research thinks this could be more than a $140B market over the long term, up from a $5B base in 2022, making ADCs one of the biggest growth areas across Global Biopharma. Large-cap biopharma companies are increasingly aware of the enormous potential for ADC drugs, accelerating investment for “smart chemo” and actively deploying more capital, as illustrated by Pfizer’s recently announced $43B acquisition of Seagen in 2023.
ENERGY TRANSITION
In response to climate risk and mounting social pressure for sustainability, energy production is undergoing a dramatic transition to replace fossil fuels with renewable energy sources such as wind, solar, hydro, and nuclear. Net Zero initiatives are calling on governments, companies, and other organizations to commit to becoming carbon neutral by the year 2050. Wind and solar sources are leading electrification efforts by growing capacity and improving efficiency, fast becoming cheaper than fossil fuel alternatives. The term “electrification” refers to technologies adopting electricity as an energy source as opposed to fossil fuels – for example, electric vehicles.
In previous trends, Solid-State Batteries (Trends 2021) and Picogrids (Trends 2018) we’ve highlighted how advancements in technology are shaping the future of energy. Perhaps the pinnacular energy source for the future is nuclear fusion, providing virtually limitless clean power. Unlike fission, fusion is two atoms slamming together to make one heavier atom, resulting in large amounts of energy. Recent breakthroughs in nuclear fusion mark a significant step in being able to replicate the power of stars. In theory, nuclear fusion produces significantly more power than fission without producing radioactive waste, a major drawback to current nuclear energy productAion. Last December, the National Ignition Facility (NIF) achieved a decades-long goal of “ignition”, the process where a fusion reaction expels more energy than was originally input, resulting in a net energy gain. Since then, the process has been replicated several times with significant improvements to efficiency, able to produce 3.88 megajoules of energy from 2 megajoules of energy input, about as much energy as 1.5 pounds of TNT. However, utilizing nuclear fusion for grid scale energy production is still likely years, if not decades, away.
PRODUCTIVITY BOOM
We have written previously about Unproductive People (Trends 2023) and other disturbing trends that have weighed on productivity, such as “quiet quitting” in the U.S., “lying flat” in China, Great Resignation (Trends 2022), Playing with FIRE (Trends 2019), and the tragic epidemic of addiction. Productivity growth in the U.S. has stagnated to just 1.2% per year on average over the past decade, despite many technological innovations over the same period. Perhaps advancements like smartphones and social media may have distracted workers and spurred more consumption of content than production of goods and services. However, Multimodal AI (Trends 2024) and GLP-1s (Trends 2024), in contrast, may be advancements that finally usher in a significant, sustained resurgence in productivity.
Artificial Intelligence (AI) and GLP-1s will have broad implications for businesses and the economy, but perhaps its most significant may be to accelerate labor productivity. According to data from the National Health and Nutrition Examination Survey (NHANES), over one third of Americans are obese and according to the Association of American Medical Colleges (AAMC), more than 21 million have a substance abuse disorder. While GLP-1s have grabbed headlines for effective weight loss, studies have also observed a reduction in addictive behaviors. The promise of a wonder drug such as GLP-1s could dramatically change the healthcare landscape and society, potentially making a greater portion of the U.S. population healthier and more productive. Additionally, AI will help to automate and scale many tasks humans currently perform. Companies such as Salesforce and Microsoft report seeing as much as a 50% productivity improvement using GenAI tools. As new GenAI tools roll-out to different industries and job functions it will be important to monitor how much of a productivity lift they see. According to J.P. Morgan Market Insights, most analyses posit 1.5-3.0% increase in labor productivity per year globally over the next decade. Importantly, this does not factor AI’s potential to accelerate innovation, which could provide further upside to estimates.
IMMORTALITY
Benjamin Franklin once quipped, “…in this world, nothing is certain except death and taxes.” While taxes may be unavoidable, recent breakthroughs in science and technology are working hard to extend human health spans, making people healthier and more productive well into their later years of life. Advancements and trends in computing, genetics, and medicine (AlphaFold, Trends 2021; SynBio, Trends 2022; Connected Health, Trends 2022) are converging and will help us live longer and healthier lives. Today, we are beginning to have a much more in-depth scientific understanding of how aging contributes to many fatal risk factors such as heart disease, diabetes, cancer, and neurological disease. Blue Zones, which are regions around the world where humans are healthy and active well into their 100s, have been extensively studied and have given us a potential blueprint of how humans can increase their health span. A wealthy entrepreneur, Bryan Johnson, is taking these advancements to an even more extreme level of experimentation on himself, spending $2 million a year and with a team of 30 doctors tracking every metric possible in how his body functions. As a result of his strict regimen, he is aging at a rate substantially slower than a normal 45-year-old and his biological age based on some factors are equivalent to an individual half his age.
These efforts to slow down the aging process are not enough for some. Ray Kurzweil, a celebrated inventor and technologist, hypothesizes that by 2030 humans will have discovered how to achieve immortality, not just slowing down the aging process, but reversing it. Given the rapid advances we’ve recently seen in science and technology Kurzweil’s prediction may not be as far-fetched as it once seemed. At the very least, the trend towards helping us all live longer, healthier, and more productive lives is something we all can look forward to, even if taxes are still a certainty.
SHOW ME THE MONEY
In previous trends we have highlighted how companies and markets adapt to the current interest rate and inflationary environment (CRaP, Trends 2019; Bond Vigilantes, Trends 2023). The past couple of years have seen a dramatic reset of interest rate and inflation expectations, given the fastest and largest increase in interest rates since the 1980’s. At this stage, the million-dollar question regarding interest rates and inflation is: what does the new normal look like and how does that change corporate behavior, strategy, and investor expectations?
The post-Global Financial Crisis (post-GFC) period between 2009-2021 was one that resulted in deflation to low inflation, ultra-low to zero interest rates, multiple stages of central bank Quantitative Easing and negative bond yields in several parts of the world. The absence of a true market-based cost of capital combined with a low growth economy incentivized companies to pursue an aggressive growth strategy and, in many cases, chase that strategy with little to no regard for profitability. One example of this was Netflix’s aggressive push into streaming and Subscription Video on Demand (SVOD), outspending the competition by billions of dollars and resulting in substantial losses in free cash flow (Peak TV, Trends 2019). In 2017, Netflix CEO, Reed Hastings commented, “In some senses the negative free cash flow will be an indicator of enormous success.” Fast forward to today — Netflix spending has plateaued, the company is raising prices, and both operating margins and free cash flow are rising substantially. The trend recently is similar across many other companies and industries from small startups to Big Tech, but the message is the same: increase profits.
We believe it’s unlikely we will return to near-zero interest rates into the next decade and are more likely to see a prolonged period of central bank quantitative tightening (QT) rather than quantitative easing (QE).
We think this means investors will increasingly place more value on companies executing on operating margin performance and a balanced growth and profitability strategy. The environment for the foreseeable future may have investors demanding, just as Jerry McGuire shouted, “Show me the money!”
MUNIS IN MOTION
The municipal bond market is notoriously stubborn and slow to embrace change, especially relative to markets for other traditional asset class securities. While stocks, Treasuries, corporate bonds, and other security types offer highly-efficient, low-cost, technology-driven venues for transactions, municipal bonds still rely on systems that many investors consider clunky and outdated. For example, well-established personal relationships and timely phone calls still play a major role in finding good deals for investors today. However, algo-powered trading and digital execution have gained significant acceptance and market share in recent years, leading to cost reductions for both dealers and investors. New participants and platforms have helped to provide additional liquidity to markets, and ongoing pushes to embrace technologies like Blockchain (Trends 2016) promise to streamline the underwriting and trading process even further.
This embrace of technology hasn’t come without some pain. Just recently, one of the largest Wall Street firms announced their exit from new issue and secondary market trading business- perhaps a sign of things to come as personnel, regulatory, and IT costs continue to rise for traditional trading desks. Will Wall Street’s pain result in the muni investor’s gain? As technology advances, expect liquidity of bonds to increase, costs for investors to decline, and settlement times for municipal securities to shorten. In a time where investors expect a prolonged period of higher interest rates and increasing individual tax rates, such advances may be received as a welcome development in an otherwise antiquated market for municipal bonds.
ETHICAL AI
The recent movie “Oppenheimer” chronicles the career of Robert Oppenheimer, the American theoretical physicist credited with being the “father of the atomic bomb” for his role in the Manhattan Project during World War II. It’s a story of rapid scientific advancement that reminds us that pure and unencumbered progress can have unintended and far-reaching consequences. As technology rapidly advances into the Age of Artificial Intelligence (AI), the movie serves as a reminder to sometimes slow down and consider the broader implications. Coincidently, around the same time as the movie “Oppenheimer” was released an open letter was posted, signed by hundreds of the world’s leading AI scientists and experts, calling for a moratorium on AI development and warning that AI poses a “risk of extinction” comparable to that of nuclear war. Similar to “Oppenheimer”, one of the letters most prominent signers was Geoffrey Hinton, a leading researcher in the field and considered one of the “Godfathers of AI”. Hinton also at the time resigned from his prominent role at Google, so he could speak freely about the risks of AI and has spoken publicly about his regret for his role in the technology’s development.
The rapid pace of technology and artificial intelligence (AI) more specifically are raising ethical if not existential questions among experts. Some fear the unintended risks of AI, including the rapid progress toward artificial general intelligence (AGI), which could bring change comparable in scale with the Industrial Revolution or electricity in a time frame much faster than society could adapt economically. Additionally, misuse of AI by malicious actors would be hard to prevent, with numerous potential issues that span from public disinformation to privacy concerns to military operations.
Other trends such as the recent spat between OpenAI CEO, Sam Altman, and OpenAI’s Board of Directors suggest further stress between the for-profit motivations and arms race advancement of AI versus the public good and safety considerations. While details are still emerging about exactly why Sam Altman was temporarily fired as CEO, it does seem clear that some members of the board are concerned about the technology’s rapid advancement toward AGI and the ethical lines the company should set.
Governments are attempting to get ahead of the potential risks from AI, with Europe being the first to set regulations around responsible development and use of AI technologies. While there are always risks associated with any new technology, the development does not appear likely to slow down any time soon. Perhaps Robert Oppenheimer summed it up correctly in his motivation for completing the atomic bomb: “I don’t know if we can be trusted with this, but I know the Nazis can’t.”