Market Watch: Will AI Mania Crash Stock Markets…or Create Real Wealth?

While everything else in the market has been flat this year, AI maniacs have taken control of Wall Street as the value of stocks linked to revolutionary new technologies skyrocket.

it caused us concern
They’re headed for a repeat of the 1990s dot-com bubble that ended in the stock market crash.

“I think AI could very well become the new stock market craze,” said Mike Taylor, chief investment officer at Pie Funds.

The value of AI-related stocks has skyrocketed since Chat GPT exploded in the public eye late last year. The Nasdaq is up 33% year-to-date, while the more traditional Dow Jones index is up just 4%.

But the tech boom has been more concentrated this time around, with about seven stocks driving big gains, Taylor said.

It was essentially just the tech giants, the so-called FAANG shares, and Microsoft and semiconductor company Nvidia, who were profiting from the AI ​​boom, he said.

They were the only ones who still had the necessary technology and data to actually implement AI technology-based benefits.

“Even with those companies out, I think the profits are pretty modest,” says Taylor. “There are very few non-local breads on the market.

So are we in a bubble?

“I would say no at this stage,” Taylor said.

“Because some of those stocks are still well below 2021 levels. So it’s like late 1998 right now, so even if we grow as big as we did that year, we’re probably still 18 months to two years away.”

In fact, any meaningful correction in large-cap tech stocks would likely be a buying opportunity for years to come, he said.

In the late 1990s, stock market investors famously overestimated the speed at which new Internet technologies would revolutionize business and consumer behavior.

“I think AI adoption will be faster,” says Taylor.

“Yes, there will come a time when stock prices will outperform earnings, probably for a few years, but I think the adoption curve will be shorter and faster.”

“That said, at the moment many companies, including mine, are looking at how they can incorporate AI into their operations, but the reality is that the technology to make it happen is Not yet.”

However, broadly speaking, it seems reasonable to assume that many other large companies will begin to benefit from AI within the next two to three years, increasing their productivity and efficiency.

Taylor gave the example of McDonald’s, which has drastically reduced its workforce by introducing new self-service ordering technology.

“Ten years ago, the company had 440,000 employees. Now, of course, you go in there and order at the kiosk, but there’s no one at the counter,” he said.

“Today, the company employs just 150,000 people. Revenue has remained essentially unchanged, but profits have doubled.”

“Today, many organizations are thinking about how they can reduce headcount and improve their bottom line.”

Worries about AI disruption have made people fear the worst, but the outlook that productivity gains will drive stock market growth is positive, Taylor said.

“Since the mid-2000s, the stock market rally has been driven by central banks, low interest rates and quantitative easing,” he said.

“On the other hand, the fact that stocks are currently able to sustain a rise even with interest rates of 5% to 6% is a clear indication that the market and investors expect higher productivity going forward.”

Liam Dunn is the business editor of the New Zealand Herald. He is a senior writer and columnist as well as introducing and producing videos and podcasts. He joined Herald in his 2003.

The Market Watch video show is produced in collaboration with Pie Funds.