How good, really, is AI at predicting the stock market?

Researchers from University of Florida discovered that AI like ChatGPT can predict next-day stock performance based on financial news headlines, with a strong positive correlation between higher scores from ChatGPT and better returns. NLP has been used in financial analysis since the 1980s, but recent advancements have led to more sophisticated techniques for analyzing real-time user data from social media. Sentiment analysis plays a significant role in current NLP algorithms, with three popular approaches currently being used for portfolio construction and risk modeling: Loughran-McDonald, Google's FinBERT, and Alexandria Technology. Financial forecasting often focuses on stock market and foreign exchange rate prediction due to the complexity of financial data and difficulty obtaining information like corporate financial statements. While AI shows promise in predicting stock market movements, it is still uncertain if these models can be applied to other aspects of the financial sector, such as VC investing in early-stage startups.