What is driving the stock market?

What is driving the stock market? Historically this has been an easy answer: Wall Street. But with the rise of AI’s moving the markets, sometimes without rhyme or reason, and with the rise of social media, the question is worth asking.

There are around 8 billion people in the world. Of them, approximately 5 billion use social media. Over the years, we’ve seen how social media has been utilized as a political tool, a marketing platform, or even a financial advisor. As these digital applications continue to revolutionize our online interactions, it should come as no surprise that social media has the power to move markets.

Its ability to fluctuate stocks based on online trends and memes, explode prices for the world’s largest companies, or mobilize users to boycott has shown social media going from a fun communication tool to a major market driving force in my lifetime.

Social media’s influence on market trends

Social media provides two major benefits in the financial market: the ability to connect individuals to rapidly disseminate information, and a data collection tool for businesses and Wall Street to understand consumer behavior and interaction.

When I started at my first hedge fund at age 17, the primary driver of the market was Wall Street honchos whispering to each other in back rooms. Now, 75% of hedge funds use news and feeds from social media as part of their investment process. They buy everything from real time credit card swipes to web/foot traffic data to feed their powerful AI models. Data from everyday people often drives the market, which offers opportunities to level the playing field.

As influencing culture takes reign in the social media world, individuals with any kind of following can directly influence buying trends via a viral video or by promoting products from companies that sponsor them. The spread of information can range from the mouths of influencers to lowkey chat rooms dedicated to specific topics. For the financial sector, many chat rooms share stocks worth buying and stocks worth dropping; each piece of data plays a small part that can swell into a big market fluctuation.

The power of meme stocks

Trying to predict the unpredictable is an inescapable Wall Street trope and meme stocks are no different. Social media trends have nearly dictated the market at times, from an influencer sharing her new favorite makeup to a large-scale protest plummeting a company’s stocks. Meme stocks—which increases due to rising popularity on social media—have become a significant tool to fluctuate the market. Britannica Money lists the following five characteristics found in a meme stock:

1. Heavily influenced by social media
2. Greatly volatile stock prices
3. Quickly fluctuating trading volumes
4. Substantial interest from individual investors
5. A disconnect between prices and company business

Platforms such as Reddit and X (formerly Twitter) have popularized meme stocks by providing avenues for users to share their financial opinions and mobilize behind certain stocks.

But it is not just heavily shorted stocks like AMC or GME that draw waves of attention. Market leaders like Nvidia and Tesla have seen social sentiment spikes that drive up prices and valuations to levels that are hard for traditional models to understand. For instance, Nvidia’s stock has surged because of the immense popularity and positive sentiment surrounding its advancements in AI and graphics technology. Similarly, Tesla has experienced significant market wins, with a market cap of about 2.5 times higher than Toyota. This is despite Tesla having less than one-third of the revenue of Toyota the last 12 months! Tesla’s share prices at times look like they are moving more with social sentiment or news events than with company earnings.

With these trends, how much value should we place on social sentiment in stock trading?

Determining the appropriate value to bake into stocks beloved by the masses is a complex question. Often, institutions ride momentum waves higher and higher, instead of taking a more controlled approach of enforcing traditionally “appropriate” value.

While there are complaints about retail investors driving irrational valuations, the fact that it even gets to this point underscores how powerful the retail investing arm has become.

Social media calls for boycotts

Public perception is incredibly important in a company’s financial performance and success. Thus, appealing to the ethics and morality of consumers is vital. Social media has presented itself as a social justice tool to protest perceived injustice. Online calls for boycotting have risen in the last few years, with industry-leading companies such as Starbucks and Bud Light facing financial consequences in the stock market. Some Starbucks consumers demanded a boycott against the coffee chain for its alleged pro-Israeli sentiment and clash with union organizers over the issue, with a 9.4% decrease in market value at that time. With Starbucks making a high-profile CEO change recently, you can certainly make the case that this boycott impacted all the way up the “food chain.” Similarly, Bud Light received backlash for its effort to collaborate with a transgender influencer for a campaign. Conservative protest resulted in a 32% decrease in sales for the brewing company.

Brands’ public sentiments transfer from word-of-mouth among friends to the online community’s determination.

What does all of this mean? Companies can track online metrics to assess marketing strategies as well as consumer engagement with the brand. Artificial intelligence applications can help with this tracking, so that organizations can stay ahead of negative sentiment, taking action immediately, instead of waiting to communicate through traditional media channels.

Social media has taken the financial world by storm these last few years; we are seeing a wave of globalization at the tip of our fingers. If companies, especially those involved in finance, want to thrive as the next generation of young investors continue to pick and choose where they place their money, they need to understand that social media has become a key player in the financial market today.

Who controls the market? It’s still Wall Street, but it may be loosening that grip.

George Kailas is CEO at Prospero.Ai.