Introduction to the AI Boom
Artificial intelligence has fueled the stock market to record highs this year, with companies eager to show off their AI capabilities and investor favorites like chip manufacturer Nvidia flying high on expectations of rapid growth. However, a tinge of fear is overshadowing this exuberance, as investors fear the AI boom could fail.
The Fear of a Bubble
The frightening rise of AI-related stocks is drawing comparisons to the dot-com era of the late 1990s, when stock prices of many Internet companies soared despite huge financial losses. When that bubble burst in the early 2000s, it toppled former high-flyers like Pets.com, burned investors’ portfolios, and triggered a recession. Bubbles occur when stocks soar on exaggerated growth expectations that ultimately prove to be unrelated to a company’s underlying fundamentals – a painful reality check that usually ends with overvalued stocks falling back to earth.
Market Performance and AI
Thursday’s stock market plunge – when high-flying AI stocks like Nvidia and CoreWeave caused the tech-heavy Nasdaq Composite to post its biggest decline in months – further fueled fears of another bubble this week. Beyond the stock market, economists are also wondering whether AI will be as transformative for businesses as proponents of the technology claim. Proponents say AI will spark a productivity boom and lead to greater business growth and profitability.
The Role of Tech Giants
The stock market is a huge bet on AI right now, with just a handful of tech giants driving everything. This year’s 15% rise in the S&P 500 is largely due to a handful of tech giants investing heavily in AI. The combined market capitalization of the so-called “Magnificent 7” – Google owner Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla – now accounts for a record 37% of the total value of the S&P 500.
Irrational Exuberance?
That could give the millions of Americans who are saving for retirement in 401(k)s and other plans food for thought. When market profits depend so heavily on a few dominant companies, as they did during the dot-com bubble, the consequences could be dire if investors suddenly become disillusioned with AI. “No one wants to be caught dancing after the music stops,” notes a portfolio manager.
Why This Time Could Be Different
Still, today’s stock valuations are nowhere near what they were in the late 1990s, note analysts. The investment bank’s analysis of the Magnificent 7’s average price-to-earnings ratio found that it was "about half that of the seven largest companies" in the late 1990s. The question of whether AI is fueling a bubble similar to the late 1990s was even asked of Federal Reserve Chairman Jerome Powell, who noted that the companies driving the AI boom actually have profits, unlike the dot-com era.
The Potential for Transformation
For these bets to pay off, AI must transform U.S. businesses by fueling a productivity boom that translates into stronger business growth and profitability, experts say. "We want to understand whether it’s storytelling or actual tangible gains," notes an economist. For technology evangelists, the AI boom will lead to a “fourth industrial revolution” that could spur economic growth. The doubters need to come on board and realize that this is a transformative technology, although such a shift will likely take much longer than some AI boosters currently imagine.
