Is the AI Boom a Bubble or the Next Industrial Revolution?

Is the AI Boom a Bubble or the Next Industrial Revolution?

It’s one of the most quoted motivators of the market’s relentless risk appetite: the disruptive force that is AI. But how far can it carry market enthusiasm with countervailing winds building?

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Talking Points:

• AI has the promise to be disruptive to the markets, the economy and even humankind itself; so it comes as little surprise it carries such enthusiasm
• In the uneven climb in capital markets with companies involved in the AI boom seemingly outperforming, how broad will the enthusiasm spread?
• While AI can continue to grow and steer innovation in the markets and economy, contraction through traditional channels is still possible

The Most Talked About Theme

The hope of rate cuts, divergence of growth forecasts and ebb and flow of tariffs have all seized the financial headlines this year. However, all of those themes pale in comparison to the juggernaut that is Artificial Intelligence (AI). In terms of share of voice, it has grown in coverage as its trajectory proves a steady course – while other headlines are prone to wax and wane. Further, the scope of influence of AI is proving unmatched. In a comparison of worldwide search for the aforementioned big-ticket influences, it is clear that there is a fixation on the influence that this technological turning point can have.

Google Search Trends for AI and Other Key Economic/Financial Themes

Source: Google Trends

The Promise of AI

Despite the relentless conversation surrounding Artificial Intelligence this year, the breadth of its influence and potential are still considerable unknowns. Could it be a revolution that once again pivots human’s march forward, ushering in a new phase of economic expansion and financial evolution? The possibilities are wide open and extraordinarily varied – as much ambition as it is imminent practical implementation – which makes it difficult for markets to discount. That said, enthusiasm will inevitably hit a point of saturation and perhaps over-reach.

For the detractors, it is perhaps too easy to draw comparisons to this current market swell to the dot-com boom through early 2000. At that point, the rise of the internet and expansion of e-commerce was opening up the world of possibilities. And investors the world over were looking to position for the shift. Of course, with the benefit of hindsight, we know that that charge ended in a dramatic market collapse. Given that this is yet another technology-centered focus, a similar look to appetite concentration towards the largest companies jumping into the AI spending spree are seen most likely to benefit. A ratio of the Nasdaq 100 to Dow Jones Industrial Average offers both relative appeal context as well as historical perspective.

Nasdaq 100 / Dow Jones Industrial Average Ratio (Monthly)

  

Source: TradingView

Specific Benefactors or the Financial System as a Whole?

At the moment, there seems little difference between those companies best positioned to take advantage – and feed into – the AI boom and the broader market itself. That is because the rising tide is currently lifting all ships. Concern around slow rate cuts, rebounding inflation rates, uncertain trade trends and the like is being bowled over by general speculative enthusiasm. That said, markets are still bound by typical fundamental conditioning; so confidence will eventually give way to a cumulative build up of unresolved challenges.

For this reason, it is worth keeping track of the major players at the center of the AI race. Should the broader market struggle to ride off the coattails of this theme, then the core participants may continue to outperform. By the same token, should these leaders start to falter, it could signal that the mirage of ‘risk on’ is lifting with few back up fundamental justifications capable of taking up such a mantel. For top names, few have been as frequently associated to AI as Nvidia. Its rapid rise to the top of the market cap list was achieved largely because of this business focus. Recently Oracle and AMD have jumped into the fray with investments related to OpenAI – the largest private company following a funding round. Even further, the ‘Magnificent 7’ are making clear efforts to stay relevant as far as this new course.

 

Nvidia Share Price Overlaid with NVDA/NDQ Ratio (Weekly)

 

Source: TradingView 

All Trends End and Some End as a Bubble

When you have an incredible rise like the one seen in AI interest or Nvidia’s stock performance, it is natural to also find scepticism from detractors. There are some signs to suggest a ‘mania’ in the accumulation of exposure supposedly on the basis of this unique point in history. The justification of confidence across the entire financial market by some loose association to this pivot is increasingly a stretch of logic. That said, just because confidence may have reached further than what the technology is capable of in the moment doesn’t mean that it has collapse.

Picking tops and bottoms is a highly improbable approach to markets given how infrequently they actually occur. That said, maintaining a healthy perspective to the prevailing market levels and the broader fundamental backdrop can lead market participants to be more attuned to potential shifts in sentiment – rather than being swept up by a ‘fear of missing out’. Ultimately, it is possible for AI to continue to advance with a deepening integration into the economy and markets to also tumble. Back in 2000, the dot-com ‘bust’ didn’t halt the march of technology. It just rebalanced the level of value in the capital markets.

Chart of Psychological Phases of Market Cycle to Bubble

 

Source: John Kicklighter

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--- Experts: John Kicklighter, Global Head of Content, Matt Weller, Global Head of Market Research