Fears of an AI bubble continue to be a major concern. Today’s stock market dip certainly continues to raise those fears.
Last week, There were two fairly large dips in the stock market. One reflected at the closing bell and the other managed to pull off a recovery, making the day seem rather innocuous. Of course, that doesn’t change the fact that there were two dips in the market in one week which is not the greatest sign.
Of course, we have seen one particularly large slide last year and the question at the time was whether or not the AI bubble finally popped. Shortly after, the hype machine employed by AI companies managed to flood the zone and the gullible media gobbled it all up, effectively reversing the popping of the bubble. Credit where credit is due, it’s impressive that an industry can avoid a stock market bubble simply by BSing your way through it all.
The thing is, even if they did BS their way out of the bubble bursting, the fundamental problems remain the same. This so-called “revolutionary” technology isn’t actually capable of delivering on all of its promises. It can’t replace a lawyer, a stock market broker, or very many other professions for that matter. Pulling off a replacement requires considerable human intervention and the only thing it solves is retaining this illusion of a magical AI software capable of everything.
As for the stock markets, well, investors are wanting to see a return on that investment. They want to see those sales and actual profits, not a spreadsheet covered in red ink. That is simply not what they are seeing and some have already started bailing on the industry altogether. Today, well, was no exception.
The TSX index closed 573 points down while the Dow Jones closed 797 points. Those are not small numbers and the reports are pointing the finger at continued fears of the companies valuations – a persistent theme throughout the two previous drops. From CNBC:
Stocks retreated on Thursday, with technology stocks coming under pressure for another day. Investors also grew pessimistic about the interest rate outlook.
The Dow Jones Industrial Average lost 797.60 points, or 1.65%, to settle at 47,457.22, which is well off the record highs seen in the previous session. The S&P 500 shed 1.66% to finish at 6,737.49. The broad-based index saw notable declines in the communication services sector, led by Disney falling nearly 8% on mixed results for the company’s fiscal fourth quarter, as well as information technology. The Nasdaq Composite pulled back 2.29% to close at 22,870.36. All three major averages, as well as the small-cap Russell 2000 index, suffered their worst day since Oct. 10.
Investors continued to sell shares of technology companies, especially those in the artificial intelligence trade, amid worries about their valuations. Despite the Nasdaq starting off the week strong, the tech-heavy index posted it third straight day of losses Thursday, weighed down by heavyweights Nvidia, Broadcom and Alphabet.
Naturally, this big drop was met with a nice healthy dose of denial, saying that such a large drop is just a normal thing to see:
“It seems like a natural consolidation to me,” Ron Albahary, chief investment officer at Laird Norton Wealth Management, said to CNBC, calling the day’s pullback “healthy.” “Part of the, I think, AI narrative is that at some point all this [capital expenditure] is going to actually manifest itself. The benefits of it will manifest itself within the broader economy, so if you start seeing health care and manufacturing, industrials start to actually benefit from AI, that supports the overarching narrative, which is AI capex is going to enhance productivity across the board.”
Denial is, of course, something I’ve seen before. During the 2008-2009 financial crisis, when the markets first started dipping, I still remember one person answering reporters question (I can’t remember if it was an analyst or a fellow reporter), I distinctly remember her responding that there may be some problems happening right at that moment, but it’s just a temporary setback. The problem? Well, for one, her eyes were as wide as saucers as she looked like she was fighting back the urge to scream in pure terror. For another, the markets did a brief dead cat bounce before absolutely plummeting after things hit the fan.
Perhaps most telling is the fact that some of the people pushing the denial narrative have the subtle theme of “this time is different”. So often, the AI bubble is compared to the dotcom bubble (for very good reasons, I might add), and whenever that gets brought up, the responses frequently happen to be, “this time is different” followed by very unconvincing reasons. One example was that the AI industry are selling products which is unlike the dotcom bubble. The problem is that products were being sold during that bubble as well, so that’s not exactly the strongest argument there.
Ultimately, in order for AI to actually reach profitability, there is going to be a need for trillions in terms of sales to make all of these speculative investments worth it. That is an insane ask for any industry and I’m not sure that the AI industry can pull something like that off, either. So, it’s quite understandable that there are some investors getting nervous. Are these companies going to make those revenues needed to offset the cost of these massive investments in the first place? Judging by the drop today, more and more are believing that the answer is “no”. Of course, time will tell if this is the actual point the AI bubble pops.
