AI is in a “baby bubble”. Things that can burst are:

• Bank of America said on Friday that AI is in a “baby bubble” for now.
• What could burst the bubble is the Fed pausing rate hikes and restarting the rate hike cycle.
• BofA said the root of the dot-com explosion in the early 2000s was the Fed’s 1999 resumption of tightening policy.

Artificial intelligence is the investment boom of the year, with experts saying the profit potential is huge, but if the Fed makes one mistake, this time of year could be like the dotcom collapse. Awkward pop could change things, says Bank of America.

Michael Hartnett, chief investment strategist at Bank of America Global Research, said on Friday that AI is in a “baby bubble” for now.

Excitement about the prospects of AI is evident in the market as ChatGPT, OpenAI’s open language chatbot, explodes in popularity. Shares of Metaplatforms and microchip maker Nvidia, among others, have more than doubled this year. An AI tool that powers Facebook’s parent company’s ads is getting a lot of attention. Billionaire investors are betting big on AI, such as Bill Ackman’s $1 billion investment in Google’s parent company Alphabet.

Bubbles always start with easy financing and end with rate hikes, whether it’s the “right stuff” like the internet or the “wrong stuff” like housing, Hartnett said.

The Fed may head for a moratorium on a series of rate hikes at its June 14th meeting. In an effort to curb inflationary pressures, the central bank raised the base interest rate for the 10th consecutive time this month.

But Hartnett, recalling a similar situation in the dot-com era, said the pause was a policy mistake and that the AI ​​bubble could burst if the Fed tried to fix the problem by restarting rate hikes. rice field.

The Fed’s erroneous pause in 2023 will be signaled to investors by US Treasury yields rising above 4%.

”[And] Hartnett said in a BofA flowshow note that the 10-year Treasury yield was 3.67% on Friday.

If the Fed were to pause, it would do so because the consumer price index and other measures of inflation, though off-peak, are still well above the Fed’s 2% target rate. It will be. CPI rose 4.9% in April.

Powell said at a meeting in Washington on Friday with former Fed Chairman Ben Bernanke, that tight credit conditions “may not need to raise policy rates that much to hit the target.” Stated. The Federal Funds rate was raised to 5-5.25% in March.

dot com bomb

BofA’s investment strategy team recalled the 1999 internet stock frenzy that pushed the Nasdaq Composite to a new high of 5,000.

A speculative rally in internet stocks as the U.S. economy boomed forced Alan Greenspan’s Fed to resume tightening, the newspaper said. The dotcom bubble burst after nine months.

“AI = Internet,” Hartnett wrote. The Nasdaq has fallen 78% from his March 2000 high to early October 2002. It will take nearly another 15 years for the index to regain his 5,000 level.

The market doesn’t seem to pay much attention to the bubble story so far, and the hype in this area remains strong.

The productivity gains potential of AI technology could lead to more than a 30% increase in S&P 500 index earnings over the next decade, Goldman Sachs senior strategist Ben Snyder recently told CNBC. He said AI exposure at big tech companies contributed to the rise in the Nasdaq Composite. Last year he fell 33%, and in 2023 so far he will increase by 21%.

Fundstrat said this week that investors are right to be optimistic about AI, but that mega-cap tech stocks look overbought right now.

As of Friday, traders in the federal funds futures market gave an 80% chance that the central bank would stop raising rates in June.