Over Hyped, Under Delivered, AI Bubble Concerns Persist

Concerns are continuing to persist over the AI bubble as some warn it is worse than the dot com bubble.

In my years of coverage, I have seen over hyped things come and go. Examples of this includes BitTorrent technology being stuffed into everything, blockchain with its promise to completely revolutionize everything (it was always just a ledger), Bitcoin promising to completely take over the world of money, and, these days, AI with its promises to be the next industrial revolution or cause humanity to go extinct (depending on which side of the AI hype coin you happen to reside in). While the world of technology is packed full of exciting things, there has also been plenty of examples of things being over hyped. I still believe AI is one such example that we happen to be living in.

One of the major concerns about AI is the fact that we are seemingly in a major bubble in terms of stocks. AI companies are receiving huge amounts of capital from investors over a product that might actually be useful someday in… some way. The reality has long been that text based generative AI has always been little more than a glorified auto-complete. It’s purpose in nature is to generate text that sounds like it was written by a human. Concepts like accuracy and truth are merely foreign concepts to AI where if it happens to get that right, that’s a bonus, not an expectation. It’s a big reason why you get “hallucinations” – the AI is simply filling in the information gaps with just made up stuff.

Yet, there are plenty of those who still persist to believe the hype behind AI. No amount of evidence that says that AI is simply not up to the task promised by the companies dedicated hype machines will change very many people’s minds. Many still believe AI to be this infallible thing that exceeds human capabilities in every way and it’s only a matter of time before it is widely adopted, rendering much of the human workforce obsolete – especially those who write or create art. This is a big reason why I consider AI to be over hyped and under delivered. It’s not the technologies capabilities that is selling it, but rather, the cult-like belief that current AI technology is something that it is not. People believe in the hype and that is what matters more above all else.

While this sort of behaviour should be sparking eye rolls, the real problem is what happens in the general stock markets. In the last few years, whenever I browse the headlines surrounding AI, it’s packed with, among other things, articles explaining that the AI gold rush is on and so-called “analysis” on which AI companies are the best to invest in. While shady investment “advice” articles have always been a dime a dozen, a lot of them are heavily cashing in on pushing questionable “advice” in AI companies. Basically, they push things like which companies are going to shoot up thousands of percent in value, going to be worth 100 times the size of Amazon, and so on and so forth. The phrase “a fool and his money are soon parted” screams in my head whenever I see these kinds of headlines.

Yet, evidence points to the fact that AI companies are getting investors and the problem is very noticeable. So, the question is, what happens when companies are over hyping and under delivered? Well, you tend to get stock market bubbles. Last year, I wrote articles about the AI bubble. At the time, I was questioning how long it was going to take for the bubble to burst. A month later, NVidia dropped nearly 14% in a week. The overvalued stocks seemed to be collapsing at the time, so I wondered if the AI bubble finally burst. Well, in the weeks and months since then, there was a massive rush of AI hype and markets seemed to stabilize. The bursting of the AI bubble seemed to be postponed thanks to another push of hype.

While the brief drop got erased, it doesn’t necessarily mean that the AI bubble bursting isn’t going to happen. Understandably, there are still concerns that the AI bubble could eventually burst. Analysts are arguing that things are looking worse than the dot com bubble. From Futurism:

For years now, certain experts have warned that the AI industry is a massive bubble waiting to burst. The enormous hype driving a market frenzy, they say, could lead to a collapse if it’s exposed to be built on widespread overpromising.

Most recently, Apollo Global Management chief economist Torsten Slok warned that the current AI bubble is starting to look even worse than the market conditions leading up to the dot-com implosion of the late 1990s.

“The difference between the IT bubble in the 1990s and the AI bubble today is that the top 10 companies in the S&P 500 today are more overvalued than they were in the 1990s,” Slok wrote in a note that was widely circulated online.

A chart shows the price to earnings (P/E) ratios of the top ten performing companies in the S&P 500 against the rest of the index. A high P/E ratio, generally speaking, indicates that a stock’s price is extremely high relative to its earnings.

The chart shows that the P/E ratio continues to creep higher and higher over the last five years, well above the rates we saw throughout the 1990s. In other words, the top ten companies in the S&P 500 are far more overvalued than they were in the years leading up to the dot-com crisis.

Slok is ringing the alarm bells over the apparent market frenzy, driven by tech titans that are heavily invested in the AI industry. By index weighting, AI chipmaker Nvidia leads the pack in the S&P 500, followed by Microsoft, Apple, Amazon, Meta, and Alphabet, all of which have made multibillion-dollar investments in AI.

If you want further evidence that AI is grossly over hyped, look at the headlines these days. The two big ones right now are “OpenAI CEO tells Federal Reserve confab that entire job categories will disappear due to AI” (which he says AI is better than humans at things like medical diagnosis) or “OpenAI’s Sam Altman warns of AI voice fraud crisis in banking” (where Altman argues that this will totally be a thing soon, he totally swears!). This is the two sides of the AI hype in action. You get the promise that AI is going to be doing everything and the flipside of how AI is going to lead to impending doom because it’s just so gosh darn good at what it does. Notice how nothing about this shows what AI is actually doing now, just grandiose predictions of the future of how incredibly revolutionary AI is going to be any day now… aaaaany day now. It should go without saying that this is all hype and little substance. Altman is leveraging both greed and fear at the same time to try and push this AI hype machine and while it might not work on me, it is working on the less knowledgeable who suddenly see themselves as experts because they heard someone say something on the news.

The only thing that’s really impressive here is that this bubble has been going for as long as it has. The fact that the AI bubble hasn’t burst yet is a pretty impressive. Still, as long as the theme continues to be that AI is run on hype and not substance, then it’s really not a matter of “if” the bubble bursts, but “when”.

Drew Wilson on Mastodon, Twitter and Facebook.