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Artificial intelligence

The AI Boom: A Tipping Point Looms Amid Wild Spending and Speculation

Strategic Insights

— 2 min read

A surge in artificial intelligence investment has sparked both excitement and concern among investors, with some warning of an impending bubble. The AI sector has seen unprecedented growth, with stocks generating 75% of S&P 500 returns and accounting for most of the wealth built by the world's richest people last year. However, with warnings of absurd stock valuations and a concentration of Big Tech in the U.S. stock market, investors are left wondering when the bubble will burst.

Key Takeaways:

  • The AI boom has led to a surge in investment, with AI-related stocks generating 75% of S&P 500 returns, 80% of earnings growth, and 90% of capital spending growth in a J.P. Morgan paper.
  • Spending on data centres in the U.S. is on the verge of eclipsing spending on the construction of office buildings, with data centre-related spending accounting for around half of U.S. GDP growth in the first half of this year, according to tech investor and author Paul Kedrosky.
  • Torsten Slok, chief economist at Apollo Global Management Inc., warns that the "AI bubble today is bigger than the IT bubble in the 1990s."
  • The AI infrastructure build-out is largely supported by cash flows rather than debt, with Morgan Stanley estimating that around half of the $3-trillion expected to be spent on data centres over the next three years will be financed by Big Tech's internal cash flows.
  • The AI hyperscalers are shoveling money out the door rapidly, with Meta Platforms Inc. CEO Mark Zuckerberg downplaying the risk of misspending a "couple of hundred billion dollars" on AI.
  • Nvidia Corp. has announced it will invest as much as $100-billion in OpenAI, the developer of ChatGPT, while OpenAI plans to spend $300-billion on computing power from Oracle Corp.

Statistics:

  • S&P 500 returns: 75% generated by AI-related stocks (Source: J.P. Morgan paper)
  • Earnings growth: 80% generated by AI-related stocks (Source: J.P. Morgan paper)
  • Capital spending growth: 90% generated by AI-related stocks (Source: J.P. Morgan paper)
  • Spending on data centres in the U.S.: on the verge of eclipsing spending on the construction of office buildings
  • Data centre-related spending: accounts for around half of U.S. GDP growth in the first half of this year (Source: Paul Kedrosky)

Sources:

  • J.P. Morgan paper: (date not specified)
  • Bloomberg: (date not specified)
  • Torsten Slok, chief economist at Apollo Global Management Inc.: (date not specified)
  • Morgan Stanley: (date not specified)
  • Paul Kedrosky, tech investor and author: (date not specified)
  • Mark Zuckerberg, CEO of Meta Platforms Inc.: (date not specified)
  • Nvidia Corp.: (date not specified)
  • OpenAI: (date not specified)
  • Oracle Corp.: (date not specified)

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