Is the Stock Market in an AI Bubble?
The popularity of artificial intelligence (AI) surged after the introduction of Chat GPT in Q4 2022. Companies across all sectors have been discussing their AI strategies at an elevated pace since then:
Current expectations are that this transformative technology will increase revenue and cost savings across most sectors of the stock market. However, until now, the main stock benefactors from AI have been the large-cap tech firms linked to the development and use of AI infrastructure, such as chips, data centers, related logistics, and products that enable the widespread adoption of AI.
Although large-cap technology stocks are currently at the center of AI discussions, the answer to the question of whether there is an AI stock market bubble may ironically be found in non-tech sectors over the long run. These companies, often referred to as “old economy stocks” (Bloomberg and Standard and Poor’s define old economy stocks as financials, utilities, energy, industrials, materials, healthcare, and consumer staples) are expected to realize actual revenue increases and cost efficiencies as a direct result of AI implementation. It is important to keep in mind that it is the expectations of these benefits that will affect prices, which are currently high!
On average, old economy stock sectors have profit margins of about 1/3 of what the largest tech companies have today. The good news is that they do not have to experience near the increase in revenue or cost savings compared to a large tech firm to have the same benefit in margin expansion, which has historically been a large driver of stock price.
In conclusion, we believe the stock market is currently pricing in robust future benefits of AI across most sectors of the economy. The determination of the stock market being in an AI bubble most likely rests on this benefit becoming more of a reality than it is presently!
Have questions or want to speak with our team directly? Contact us.
Robert Amato, CFP®, CIMA®
Principal
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