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Market Caution Amid AI Investment Surge
Wall Street veteran Jim Covello, with over three decades of experience, understands the risks of betting against a tech stock bubble. He’s seen this play out with dot-com companies in the late 1990s and cryptocurrencies more recently. Currently, Covello predicts a similar scenario with the surge in artificial intelligence (AI) investments, cautioning against wagering against firms such as Nvidia Corp. Despite his certainty of an inevitable market correction, Covello acknowledges it might not occur immediately.
Covello argues that the extensive investments in AI won’t lead to an economic revolution or offer benefits comparable to historical innovations like the smartphone or the internet. He suggests that replacing jobs with costly technology contradicts previous transformational tech shifts that reduced expenses. Covello is part of a growing group of market observers questioning the AI-driven rally that’s added nearly $16 trillion to the S&P 500 since late 2022. They doubt the belief that AI will significantly boost corporate profits and economic growth.
However, not everyone shares Covello’s skepticism. Industry leaders like JPMorgan Chase & Co.’s Jamie Dimon and State Street Corp.’s Michael Arone remain optimistic about AI’s transformative potential. Within Goldman Sachs, senior global economist Joseph Briggs projects AI will automate a quarter of all work tasks, potentially accelerating economic growth. This optimism has fueled significant investments from major tech companies, benefiting hardware providers like Nvidia, Broadcom Inc., and Super Micro Computer Inc.
Yet, skeptics warn that these high expectations might be overstated, posing a risk of a stock-market correction if tech behemoths reassess their investments. David Bahnsen of the Bahnsen Group is preparing for this outcome by avoiding large tech stocks like Nvidia, recalling the dot-com bubble burst in 2000. Despite recent dips due to trade war concerns, tech stocks remain near record highs, with Nvidia adding nearly $2 trillion in market value this year. A significant portion of the S&P 500’s gains since October 2022 comes from tech giants like Apple, Microsoft, Nvidia, Alphabet, Amazon, and Meta.
So far, the return on AI investments has been modest. Major firms like Microsoft, Alphabet, Amazon, and Meta have collectively invested over $150 billion in capital expenditures recently, much of it in AI infrastructure. Microsoft reported AI contributions to a 31% growth in sales from Azure and cloud services. Amazon claims a “multi-billion dollar revenue run rate” from AI, while Alphabet noted increasing AI contributions to Google Cloud revenue. Yet, some believe focusing on these immediate figures is premature, expecting long-term profitability from current data center investments.
Contrarily, some cloud-computing customers aren’t seeing significant gains. For instance, Salesforce projected its slowest quarterly sales growth despite AI investment, and a survey by Lucidworks indicated fewer than half of AI investors observed considerable returns.
Covello remains doubtful that significant returns from AI investments will materialize, reflecting on his career tracking tech industry trends. He estimates around $1 trillion in AI infrastructure investments are needed over the next few years for adequate returns. While AI shows potential in areas like coding, the efficiency gains may not justify the expense. Should substantial uses not emerge within the next 18 months, Covello predicts the stock market will shift. Nevertheless, he believes the current buildout will continue to attract investors to AI-related stocks.
"One of the most important lessons I’ve learned over the past three decades," Covello said, "is that bubbles can take a long time to burst."
