AI: The New Bubble or Just Overhyped Hype?
As traders and investors, we’re always on the lookout for emerging trends, but let’s pause for a moment to examine whether the current hype surrounding artificial intelligence (AI) is genuinely rooted in promise or simply another echo of a bygone bubble. History has shown us that fascination with technology can cloud judgment, as it did during the dot-com era when “story stocks” reigned supreme. What we’re witnessing today with AI is strikingly similar and it’s crucial that we dissect this phenomenon, as it could impact our trading strategies and investment decisions.
The Dot-Com Bubble: A Brief Recap
Flashback to March 2000, a pivotal moment when Gary Smith delivered a sobering analysis at an academic conference celebrating the booming stock market. The prevailing sentiment was that the Dow Jones Industrial Average (DJIA), hovering below 12,000, would skyrocket to an outlandish 36,000. Despite a prevailing euphoria—fueled by Moore’s Law and the brilliance of the dot-com whiz kids—Smith was the lone voice warning of an impending crash, stating unequivocally, “This is a bubble, and it will end badly.”
And did it ever. The Nasdaq Composite plummeted by 75% over the next three years, proving that many investors had become beguiled by narratives rather than focusing on tangible metrics like profits and revenue.
The AI Era: Are We Rushing into Another Bubble?
Fast forward to today, and the narrative has shifted to AI. The seductive story of machines replacing humans has gripped the attention of both investors and academics alike. Many experts suggest that AI technologies will redefine productivity and employment, raising alarms about a potential near worker-less world. But are we, yet again, being enchanted by a well-spun tale?
The Numbers Don’t Lie
A plethora of studies has emerged asserting that the benefits of AI will surpass those of historical revolutions like steam power. Yet, the numbers tell a different story. Current revenue reports for AI companies are shockingly low—estimated at between $10 billion and $30 billion for 2024. For context, during the height of the dot-com boom, internet subscribers and e-commerce generated revenues in the hundreds of billions. AI’s figures fall short, prompting industry experts like Sequoia Capital’s David Cahn and Goldman Sachs’ Jim Covello to raise red flags about a potential bubble.
What’s fueling the AI hype?
When OpenAI launched ChatGPT in late 2022, the AI frenzy reached a fever pitch. Companies began hawking AI applications as the Holy Grail to do things “better, faster, and cheaper”—often with little to no evidence to back these claims. The perception of generative AI has drawn parallels to the dot-com excitement, where firms simply added “.com” to their names and watched as stock prices nearly doubled overnight.
The Reality Check
Despite predictions of mass obsolescence for various job roles (including radiologists and financial examiners), the employment landscape reveals a different picture. The U.S. has seen consistent job growth barring the Great Recession and COVID-19 pandemic. It turns out these predictions may be more fiction than fact, akin to the dot-com advocates who celebrated “hits” and traffic as valid measures of success. Meanwhile, actual profits and forecasts were disregarded.
Final Thoughts: A Cautious Strategy for Traders
As savvy traders, it’s essential to navigate this current wave of AI hype with caution. The excitement surrounding AI does not adequately reflect fundamentals, and with historical precedents like the dot-com bubble, we must stay vigilant. Our trading strategies should be rooted in financial realities rather than mesmerizing narratives. Keep your eyes on profit margins, revenue growth, and the genuine capabilities of AI technologies rather than the pretty stories painted by excited executives.
In conclusion, while AI holds undeniable potential, let’s remain grounded as traders. We should not let ourselves be swept away by the narrative without scrutinizing the hard facts. Remember: facts over fanciful tales will lead to successful trading and investment.
