Just about everyone in the investing world, it seems, is bullish on artificial intelligence over the long term.
Tech firms, utilities and other companies plan to spend more than $1 trillion on AI infrastructure over the next several years, according to Goldman Sachs analysts. In a recent note, researchers from the BlackRock Investment Institute said AI could usher in a transformation on par with the Industrial Revolution.
Rank-and-file investors see the potential, too. Chipmaker Nvidia, seen as the leading player in the AI revolution, is up more than 175% over the past 12 months. All told, companies in the tech and communication services sectors — the ones investing most heavily in AI — make up about 44% of the S&P 500.
But whenever you have that rapid a rise, you have to be aware of the risk that investors have gotten out over their skis, says Christopher R. Jackson, senior vice president at UBS Wealth Management.
“I don’t think anyone would tell you that AI is not a generational investment theme,” he says. “I think the concern, especially over the near term, is how quickly things have gone.”
If the recent runups in AI-related tech stocks reflect anticipation of massive gains in productivity, investors could be in for some turbulence if the revolution comes a little later, or a little less forcefully, than expected, Jackson says.
Can AI deliver on its promise?
For all the of the excitement around the potential productivity gains from generative AI, there are those who view its future rise with skepticism.
Given what firms are spending on generative AI applications, the technology will have to be completely game-changing, says Jim Covello, head of global equity research at Goldman Sachs. And it’s not quite there yet, he adds.
“AI technology is exceptionally expensive, and to justify those costs, the technology must be able to solve complex problems, which it isn’t designed to do,” he said in an interview with Goldman analysts.
The analysts also interviewed MIT Institute Professor Daron Acemoglu, who expressed concerns about the timeline of AI becoming an economy-changing technology.
“Given the focus and architecture of generative AI technology today, these truly transformative changes won’t happen quickly and few — if any — will likely occur within the next 10 years,” he said.
None of that is to say that AI technology isn’t the way of the future. But if the future is further down the road than expected, certain firms that are spending heavily now may find themselves in precarious positions in the intermediate term, says Jackson.
“It’s certainly a risk to the thesis: Can companies continue putting out this kind of money without any near-term return?” he says.
Some companies have more wiggle room than others. Many of the largest firms on the market have the ample cash flows and steady earnings to sustainably fund major capital expenditures on AI, Jackson says. And even while citing several AI skeptics, Goldman Sachs analysts still see a promising runway for companies, like microchip makers, that manufacture the proverbial “picks and shovels” of the AI gold rush.
But the expectation among many market watchers is that AI will radically increase business productivity for a wide variety of companies in the future. If that future is further away than previously thought, you may see some investor enthusiasm dim, which in turn could put a damper on stock prices, says Jackson.
This is especially true, he says, given that large-company technology stocks are already trading at a significant premium to the rest of the market.
“The concern is that the market’s always looking forward. How much of the story is priced into the stocks, and what future growth rates are already baked into the current prices?” Jackson says. “At these valuations, there’s not a lot of room for error.”
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