AI mania has taken hold of Wall Street as stocks associated with the revolutionary new technology soar in value this year while everything else on the market remains flat.
That has prompted fears that we are headed for a repeat of the late-1990s dot.com bubble that ended with a bigstock market crash.
“I think there’s a genuine case for AI developing into another stock market frenzy,” says Pie Funds chief investment officer Mike Taylor.
Since Chat GPT exploded into the public consciousness late last year, stocks with any connection to AI have soared in value. The Nasdaq is up 33 per cent for the year to date, compared to just a 4 per cent gain for the more traditional Dow Jones index.
But this tech boom is even more concentrated than that, with about seven stocks driving the big gains, Taylor said.
Essentially it was just the tech giants - the so-called FAANG stocks plus Microsoft and chip company Nvidia - that were cashing in on the AI boom, he said.
They were the only ones with the technology and data needed to really implement AI technology-based gains as yet.
“I think once you strip out those companies, returns are pretty modest,” Taylor says. “The market doesn’t really have breadth outside that area and I think at the moment it is a bit of an AI mania.”
“Because some of those stocks are still well below where they got to in 2021. So yes, they’ve gone up but they’re still not at stratospheric prices yet. If we compare it to the tech in 2000, we’d sort of be at late 1998 so if it was to go or blow as big as that year there’s still probably 18 months to two years to go.”
In fact, any sort of meaningful correction in large-cap tech stocks would probably be a buying opportunity for what’s to come in the next few years, he said.
Sharemarket investors famously overestimated the speed at which new internet technology would revolutionise business and consumer behaviour in the late 1990s.
“I think AI will be adopted faster,” Taylor said.
“Yes, there will probably be a period where share prices run ahead of profits, perhaps by a couple of years but I do think that that adoption curve will be shorter and faster.”
“Having said that, you know, at the moment plenty of businesses are looking at how they can bring AI into what they do, my company included, but there’s actually not the technology there yet to do that.”
Broadly though it seemed reasonable to assume that in two to three years a lot of other big corporates will start to benefit from AI and see improved productivity and efficiency.
Taylor cites the example of McDonald’s, which has massively reduced staff numbers as it has embraced new self-service ordering technology.
“Ten years ago they had 440,000 employees. You go in there now, of course, you order through a kiosk, there’s no one at the counter,” he said.
“They’ve got only 150,000 employees today. Their revenue’s basically stayed the same, but they’ve doubled their profits.”
“There are lots of organisations out there today who will be thinking, you know, how can I reduce my head count and improve my margins?”
While fears about AI disruption have people fearing the worst, the prospect of productivity gains driving sharemarket growth is a positive, Taylor said.
“Since the mid-2000s, sharemarket gains have been driven by central banks, low-interest rates, and quantitative easing,” he said.
“Whereas potentially now, the fact that we can still sustain a stock market rally with 5-6 per cent interest rates clearly tells you that the market or investors are anticipating ... productivity gains to come.”
Liam Dann is Business Editor at Large for the New Zealand Herald. He is a senior writer and columnist as well as presenting and producing videos and podcasts. He joined the Herald in 2003.
The Market Watch video show is produced in association with Pie Funds.