Investing in the Age of AI: Confidence Over Chaos
- 043026
- 2 minutes
In the three years from the launch of ChatGPT in late 2022 to last year, AI-related stocks accounted for three-quarters of all gains in the S&P 500. But we saw a sharp pullback in Q1 of this year, when those same stocks drove roughly 70% of the market’s overall losses. While AI has continued to become steadily more ubiquitous, the gap between cost and revenue is becoming downright vertiginous. Many are prophesying imminent disaster for the market, sensing an even sharper correction looming. How worried should we really be as investors?
The term “bubble” is being thrown around quite a bit regarding AI. Strictly speaking, the concept of a bubble arises when asset prices are driven to unsustainable levels, often detached from the underlying fundamentals. This can happen when public excitement for an emerging product or service outpaces actual revenue growth, fostering an environment in which companies are valued more on future potential than on current performance. While a degree of this anticipatory behavior from investors is a natural part of a healthy market, if the mismatch between market valuation and reality grows too large, the resulting bubble may “pop” —which, as was the case in 2008 for example, can have far-reaching effects.
So is AI exhibiting characteristics typical of a bubble? That depends on who you ask, but there’s a solid argument from those clocking dot-com era vibes. As we did then, we’re again seeing companies’ valuations based overwhelmingly on projected growth rather than current profitability, even if they lack a clear or sustainable business model. And while they continue to increase spending to secure their edge in the AI sector, companies are effectively moving their own profitability goalposts—rendering that hoped-for eventuality less and less feasible.
But we do well to bear in mind that these AI companies themselves are bound to be less concerned about whether there’s a bubble and more concerned about whether they’ll be one of the few that survive if that bubble bursts.
Not to say that a crash is inevitable; a market correction may happen gradually, gracefully even. Say, for example, AI reaches a bottleneck in the form of supply chain issues or energy constraints that prevent its continued unfettered growth, slowing things down to a less reckless pace. Or perhaps AI could experience a breakthrough that helps with or solves the profitability problem, proving that it wasn’t just hype after all.
Either way, though, savvy investors recognize the value of sticking to the basics: in boom or bust, things like diversification and careful risk management are key. Spreading wealth across things like different sectors, asset classes and geographic locations can help buffer a portfolio against volatility. Regular rebalancing with your investment horizon in mind can help to keep any potential losses within a tolerable range while still working toward your goals. And while it can be helpful to keep up with the latest on the market’s ups and downs, it’s crucial for both our financial and our mental well-being that we maintain our quiet eye and be wary of profit-driven opinion. With the right perspective and the guidance of an experienced advisor, we can face the future with more confidence over chaos.
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