Despite all the hype around artificial intelligence, not all executives are hooked on the hottest technology since the Internet.
According to a recent NBER survey, nearly 90% of 6,000 executives reported that AI had “no impact on employment or productivity” over the past three years. According to Deloitte data, only 10% of executives are currently benefiting from their AI investments, and many companies believe it will take at least several years to see the benefits.
Seth Bernstein’s outlook is a little different. In fact, it’s hard to overstate how impressed AllianceBernstein’s CEO is with AI.
This is one of the society-changing technologies throughout history, he says, with its ultimate impact surpassing that of the Internet and roughly on par with the invention of the printing press in the 1400s.
“The literacy rate has expanded from 0.11% of the population to 20% to 40% to 80%,” Bernstein said in an interview with Business Insider earlier this month. “The democratization of information has changed the speed of the world and the rate of change. It has changed power relations and relationships. It has changed everything we know. I think that is the extent of the impact of AI.”
Taurat Hossain of BI
Bernstein himself uses the technology to summarize investment research and perform performance reviews, and says it has accelerated the firm’s investment committee’s ability to aggregate and analyze information when building portfolios. And these use cases will continue to expand, he said.
“AI is going to really change the way we both manage our money, the way we serve our customers, and the way we interact with our employees,” he said.
But believing in technology’s ability to change the world and believing in it as an investment are two different things.
AI stocks, including chipmakers and “hyperscalers” like Microsoft, Amazon, and Alphabet, have seen strong gains in recent years. Some valuation metrics remain at historically high levels, suggesting investors may already be pricing in future revenue increases from this technology.
History has shown that when expectations are as high as they are today, there is little room for things to go wrong, and investors can end up paying a heavy price in terms of market declines.
That worries Bernstein.
“Why not worry?” he said of a potential AI bubble.
What about future fixes?
Bernstein said there are “some similarities” between now and the dot-com bubble of the late 1990s.
Perhaps the best example is SpaceX’s IPO earlier this month, which briefly made it the world’s fifth-largest company by market capitalization, even though it wasn’t yet profitable.
There are bubbles even at the index level. The Shiller CAPE ratio (abbreviation for cyclically adjusted price-to-earnings ratio), one of the S&P 500’s valuation metrics, is near record highs due to the impact of the AI boom. This indicator compares the current stock price to the moving average of its earnings over the past 10 years.
“Evaluating something that is unproven is always more art than science,” he says.
The market is also highly concentrated, both in terms of market capitalization of AI stocks relative to other markets and market capitalization of U.S. stocks relative to the rest of the world.
The top 10 stocks in the S&P 500 make up about 40% of the index, and U.S. stocks make up 72% of the MSCI World Index. Private market exposure is likely to be based in the U.S. as well, he said. Taken together, this leaves investors vulnerable to changes in sentiment towards AI trading.
There are also external factors that can put highly valuable markets at risk. The main one is inflation, which is arguably the market’s biggest gainer right now. As of May, consumer prices were up 4.2% from a year earlier, well above the Fed’s 2% target.
Bernstein said tariffs, continued government spending and high oil prices could continue to push inflation higher.
With the above risks in mind, Bernstein said the possibility of a market correction is at the forefront of his conversations with clients, and he expects a pullback to occur at some point.
“Is there any chance there will be a meaningful fix? I think so,” he said. “Can you tell me when that will happen? No, it could take a long time.”
To prevent such a scenario, Bernstein said he tries to have his clients gradually move their funds out of the country. This is something Americans generally dislike.
“For the last 15 years, they were more or less right to do that. They’re making a lot more money here,” Bernstein said. “That’s not always true, and probably never will be.”