The world is holding its breath as it waits to find out whether this year’s estimated $US1tn investment in artificial intelligence is resting on a castle made of sand. Last week, the Nasdaq 100 – an index of the 100 biggest non-financial stocks on the American tech-heavy Nasdaq exchange – dropped by 5.5%, triggering the usual angst that the AI boom is about to go bust. The recent rot may have started with the failure of Firmus, an Australian datacentre company, to list on the ASX.
The multi-billion dollar initial public offering was, at one stage, on track to make Firmus worth more than Telstra – even before having delivered on its promised earnings. That proved to be a fever dream of its founders and a wake-up call to investors in Australia and around the world to reconsider the potential value of similar businesses. If this is the beginning of the end of the AI boom, it is only the very beginning, and tech stocks bounced back in Wall Street trade on Monday night.
Gerard Minack, of Minack Advisors, said his view was that investors were fundamentally overestimating the returns that AI providers will be able to deliver. Despite the recent wobbles, the Nasdaq 100 is still worth nearly three times more than at the start of 2023. On the S&P 500, meanwhile, tech titans Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla now account for 35% of the American sharemarket index, up from 12% a decade ago.
The total market capitalisation of the so called “magnificent seven” companies has increased by more than 50% in the past two years. Raisah Rasid, a Singapore-based global market strategist at JP Morgan Asset Management, said what she was seeing in the recent sell-off was “a valuation reset, rather than the market questioning the efficacy of AI itself”. First, that an open source AI model, potentially from China, could undermine the economics of AI and the hundreds of billions of dollars of investment – a concern shared by Minack.
The second, said Rasid, is the risk that popular opposition gains a critical mass: for example, anger about datacentre developments or that AI will do more harm to workers and society than good. The imminent quarterly earnings season in the US will deliver the latest verdict on whether the AI companies are worth their extremely high valuations. But Minack said sharemarkets can continue to climb well after warning signs over earnings emerge.
Sally Auld, NAB’s chief economist, agreed that last week’s pullback in valuations looked more like investors taking a breath rather than the entire trade running out of puff altogether. Why do we think this one will be any different?” “It suggests investors may be taking a more balanced approach. It doesn’t mean the whole thing is a disaster; there’s a reassessment under way.” The recent market action may also be evidence that investors are becoming more mindful of the risks associated with tech companies’ growing reliance on debt.
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