The Looming Artificial Intelligence Bubble

Less than two years after Chat-GPT’s launch, there are a growing number of reports which highlight this technology’s shortcomings as a productivity booster. Critics are pointing to recent stock market behaviour as evidence of another hype-driven tech bubble. What should we make of all of this?

Throughout history, there has been a lag between the development of new technologies and their impact on productivity. This reflects the time taken to diffuse them through economies, and for infrastructure and processes to adapt so that firms can harness their potential for productivity. Certainly, these lags have shortened over time. For example, it took over 70 years for the steam locomotive to become widely adopted after its invention. But this adoption lag was cut to 5-10 years for the key technologies that formed the cornerstone of the computing and internet revolution of the 1980s and 1990s. For a good part of that time, observers were questioning whether digital technologies would have any impact at all on economic growth. However, by the mid-1990s, the effects had become visible in the data, and over the second half of the decade, U.S. productivity expanded at roughly double the pace it did in the 1980s.

A growing number of economists are of the view that the boost to productivity from AI will be substantial (perhaps as much as 1.5%-pts a year in the U.S.) but that this boost won’t arrive until the second half of this decade. As evidenced with the dotcom boom during the late 90s, new technologies take years to fully materialize in the real economy. And from an investment standpoint, there is usually an incredible amount of hype around new technologies, which makes them prone to bubble behaviour.

Of course, no two bubbles are the same, and in any case, the upward march of equities was never likely to be linear. In this sense, the fact that some air has come out of the most stretched parts of the technology market is not a great surprise. But if we are right in thinking that the AI revolution is still in the early innings, the market could have quite a bit more room to run before stock valuations become extreme and an AI-driven bubble eventually bursts.

For investors looking to add AI exposure to their portfolio, we recommend taking a diversified approach through one of the following exchange traded funds (ETFs):

First Trust Nasdaq 100 Tech ETF (QTEC-US)-https://www.ftportfolios.com/Retail/Etf/EtfHoldings.aspx?Ticker=QTEC
iShares Expanded Tech-Software ETF (IGV-US)-www.ishares.com/us/products/239771/ishares-north-american-techsoftware-etf
Fidelity Global Innovators ETF- https://www.fidelity.ca/en/products/etfs/finn/

Sources: Raymond James PCS Team
Capital Economics

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Sincerely,
Marc