AI Has 'The Hallmarks Of An Inflating Bubble,' Warns Veteran Wall Street Investor

Signs are emerging that the market boom surrounding artificial intelligence (AI) might be taking on the characteristics of a bubble.

This warning comes from Wall Street veteran investor Ed Yardeni, President of Yardeni Research, Inc., in a note to clients on July 4.

“While we love the productivity-enhancing possibilities that AI offers, the AI phenomenon has many of the hallmarks of an inflating bubble,” Yardeni cautioned.

He noted that there are “big bucks chasing the AI dream,” with substantial funds directed toward companies leveraging AI technology.

‘Too Much Capital Can End Even The Best Of Parties’

This year alone, Yardeni Research highlighted several advancements AI can achieve:

• Nvidia Corp. NVDA recently introduced Omniverse Cloud Sensor RTX, new AI simulation software to improve safety, reduce costs, and expedite the training of autonomous driving systems.
• Moderna Inc. MRNA plans to integrate ChatGPT Enterprise across its organization to revolutionize business processes.
• Couples are now using ChatGPT to plan weddings, bypassing the traditional, costly wedding planner. ChatGPT assists in creating wedding websites, writing vows, and managing budgets.
• Los Angeles plans to test AI-powered cameras on Metro buses this summer to ticket drivers illegally parked in bus lanes.
• AI is also aiding teachers in developing lesson plans and grading papers.

“But at some point, too much capital can end even the best of parties,” Yardeni remarked, signaling the potential pitfalls of overinvestment.

Yardeni pointed out that hundreds of small companies have raised billions from venture capitalists eager to find the next ChatGPT.

In the past three years, $330 billion has been invested in 26,000 AI startups, a 66% increase from the $200 billion spent on 20,350 startups from 2018-2020.

Last year, generative AI deals attracted $21.8 billion, a fivefold increase from 2022.

Expectations Running Wild

“Many AI newcomers have yet to turn a profit,” Yardeni warned, suggesting that the AI-driven rally has largely been fueled by profit expectations rather than current earnings.

The semiconductor industry, which saw only 0.2% earnings growth in 2023, is projected to grow earnings by 47.5% this year and 38.8% in 2025, according to Yardeni’s latest estimates.

Several companies are running out of funds, including Stability AI. The startup reportedly laid off employees and recently saw its CEO depart.

“Fortunately, most of these companies haven't borrowed debt in the capital markets, so a repeat of the telecom bust is unlikely,” Yardeni noted.

However, if AI startups run out of cash, their suppliers could see AI-related revenues dry up quickly, generating a domino effect on the overall industry.

The Rockstar Factor

“We're the first to agree that widespread adoption of AI will be a game-changer for many industries,” Yardeni stated.

“But tech CEOs are making some pretty wild claims. Is the potential of AI really all they're cracking it up to be?”

Yardeni highlighted that AI has its “rockstars,” including Nvidia's Jensen Huang, ChatGPT's Sam Altman, and Tesla Inc. TSLA's Elon Musk.

He recalled how ChatGPT CEO Sam Altman compared AI to the discovery of agriculture and the industrial revolution. Yardeni predicts that AI will significantly boost productivity and help global GDP grow 7% annually, doubling within a decade.

Indeed, AI will enhance productivity and economic growth. But Yardeni questions the feasibility of doubling the world’s economy in such a short time.

“Doubling the size of the world economy in a decade is quite a claim,” Yardeni stated.

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