Artificial Intelligence (AI) has received considerable attention recently due to its potential to revolutionize many industries and areas of human endeavor. This surge in interest is reflected in several dimensions including research, education, business, and even government policies. Also, in the financial markets, we have seen a great interest in the recent surge of AI-related stocks like NVIDIA, which rocketed more than 30% in the aftermath of their quarterly earnings on May 24th, which pushed their valuation into the holy land of more than $ 1 trn. NVIDIA exceeded market predictions in terms of both revenue and profits, crediting the expansion to a burgeoning demand for AI-related GPU chips. This rally has been going on alongside more significant increases in the market value of other companies that are somehow related to artificial intelligence pushing sectors and more significant indices up despite market turmoil relating to the US debt ceiling debacle.
The recent upswing in NVIDIA could be an early indication of an impending financial fervor driven by AI, kickstarted last year with the release of ChatGPT, which has enabled the average person to tinker with generative artificial intelligence.
As the allure of AI stocks continue to grow for investors, some crucial questions arise: What is the likelihood of witnessing a financial frenzy around generative AI akin to the internet bubble of the late 90s and the start 00s? How might the anticipated AI revolution influence our economy and markets in the long term?
A unique revolution
Artificial Intelligence (AI) has received considerable attention recently due to its potential to revolutionize many industries and areas of human endeavor. This surge in interest is reflected in several dimensions including research, education, business, and even government policies. Also, in the financial markets, we have seen a great interest in the recent surge of AI-related stocks like NVIDIA, which rocketed more than 30% in the aftermath of their quarterly earnings on May 24th, which pushed their valuation into the holy land of more than $ 1 trn. NVIDIA exceeded market predictions in terms of both revenue and profits, crediting the expansion to a burgeoning demand for AI-related GPU chips. This rally has been going on alongside more significant increases in the market value of other companies that are somehow related to artificial intelligence pushing sectors and more significant indices up despite market turmoil relating to the US debt ceiling debacle.
The recent upswing in NVIDIA could be an early indication of an impending financial fervor driven by AI, kickstarted last year with the release of ChatGPT, which has enabled the average person to tinker with generative artificial intelligence.
As the allure of AI stocks continue to grow for investors, some crucial questions arise: What is the likelihood of witnessing a financial frenzy around generative AI akin to the internet bubble of the late 90s and the start 00s? How might the anticipated AI revolution influence our economy and markets in the long term?
The economic effect of AI
The economic impact of AI will be riveting and drive global prosperity in the coming time. Broad adoption of AI across the business landscape will drive huge productivity increases by improving manufacturing and service processes to minimize costs. It is worth mentioning that long-term economic growth comes from labor, capital, and productivity. Substantial productivity gains will increase long-term economic growth despite altering demographics globally. We should therefore expect economic growth to be supported by the adaptation of AI. However, history suggests that the impact on productivity growth from the adoption of technology, in general, typically lags. The most recent example, with the adoption of the internet in the 1990s, was first felt economically in the 2000s. Hence, with AI’s current adoption, we expect economic growth to be affected by this in the 2030s.
The adoption of AI and technology, in general, comes with some financial implications. Firstly, history reveals that early adopters of technology are the ones to really reap the significant benefits until new competition comes around and the excess profits are bid away. In this regard, it would be no surprise if the coming stock market winners are the companies with an evident network effect they can leverage. Also, the whole value chain in chip production will benefit significantly from this. Secondly, AI will likely lead to a more significant wealth gap between the haves and the have-nots. Fewer companies will benefit from this boom, concentrating wealth on even fewer hands. Despite this, history has shown us that the impact of all significant technological breakthroughs is overwhelmingly positive.
Are we in a bubble?
Back to the original question regarding whether we are experiencing a bubble like the internet bubble in the late 90s and start 00s. Here I want to mention a pivotal book in assessing potential bubbles. It is called “Manias, Panics, and Crashes: A History of Financial Crises” by Charles P Kindleberger. In this book, Kindleberger reveals three common catalysts that have been in place when looking at all the historical financial manias:
1. An event that ignites interest from investors
2. Easy access to money (significant liquidity)
3. Widespread participation through different instruments
Looking at the economic and financial situation now, we have had an AI event that has ignited the interests of investors. Money is not “easy” due to the high interest rates and the ongoing focus from central banks on draining liquidity from the financial system. Also, the speculation is only in a handful of stocks so far and thus is not widespread as we would expect if this was indeed a bubble. In other words, we are not in a bubble or mania yet.
This means that many opportunities will reveal themselves over the coming years, and it is still possible to find exciting investment cases.