The rise of artificial intelligence (AI) has captivated Wall Street, with stocks associated with this groundbreaking technology soaring in value while other sectors remain stagnant. However, this surge has raised concerns about a potential repeat of the dot-com bubble that burst in the late 1990s, leading to a significant stock market crash.
Some experts, like Mike Taylor, chief investment officer at Pie Funds, believe there is a genuine possibility of a stock market frenzy surrounding AI. Since the emergence of Chat GPT last year, stocks connected to AI have experienced remarkable growth. While the Nasdaq, a tech-heavy index, has climbed 33% year-to-date, the more traditional Dow Jones index has only seen a 4% gain. Taylor highlights that this tech boom is driven by a select few stocks, primarily the tech giants known as FAANG (Facebook, Amazon, Apple, Netflix, and Google) along with Microsoft and Nvidia. These companies have the necessary technology and data to fully leverage AI’s potential, leaving other stocks with more modest returns.
However, Taylor emphasizes that despite the substantial increase, some AI-related stocks have not yet reached stratospheric prices. He compares the current AI market to the late 1998 stage of the tech boom, suggesting that there may still be another 18 months to two years before a potential bursting of the AI bubble. In fact, Taylor believes that any significant correction in large-cap tech stocks could present a buying opportunity for future developments in the next few years.
Looking back at the late 1990s, when investors overestimated how quickly new internet technology would reshape business and consumer behavior, Taylor believes AI adoption will occur more rapidly. He predicts that although there may be a period where share prices outpace profits by a couple of years, the adoption curve will be shorter and faster. However, Taylor notes that while numerous businesses are exploring how to incorporate AI into their operations, the technology currently falls short of meeting these ambitions.
Nevertheless, Taylor believes that in two to three years, other large corporations will start reaping the rewards of AI, experiencing improved productivity and efficiency. He offers McDonald’s as an example, noting how the fast-food chain has reduced its workforce significantly by embracing self-service ordering technology. Despite consistent revenue, McDonald’s has doubled its profits by cutting its employee count, leading Taylor to suggest that many organizations will seek similar ways to reduce costs and boost margins.
Although anxieties persist about the disruptive potential of AI, the prospect of productivity gains driving stock market growth is seen as a positive by Taylor. While share market gains over the past decade have been supported by central banks, low-interest rates, and quantitative easing, the sustained rally with current interest rates indicates investor anticipation of forthcoming productivity gains.
In conclusion, while some individuals worry about AI-induced mania in the stock market, others see the potential for substantial advancements and productivity gains. The concentrated nature of the current tech boom raises concerns, but expectations remain that broader adoption of AI will occur in the coming years. As businesses look for ways to embrace this revolutionary technology and optimize efficiency, the stock market landscape may experience profound changes with significant implications for investors and the overall economy.
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