April 22, 2024 - 11:50am
A month ago, amid the euphoria of the expected revolution in artificial intelligence, shares in Nvidia were headed to the moon and beyond. Having doubled in value since just the start of the year, the company had become more valuable than most of the world’s national economies. Together, the “Magnificent Seven” tech companies (Nvidia, Amazon, Apple, Alphabet, Meta, Tesla, and Microsoft) were bigger than every stock market on the planet outside the US. The tech sector was powering the American market into record territory, sucking in investors from across the globe.
And then, Icarus-like, they started falling back to earth. After peaking at close to $1,000 a share late last month, Nvidia has fallen by a fifth. Last week alone, the Magnificent Seven together shed a trillion dollars of value. If this keeps up, the tech sector will lead the stock market into bear territory, as investors looking to book whatever profits they made in the boom head for the exits.
This was always bound to happen. The poetic paeans of how artificial intelligence would transform the world were eventually going to give way to the prose of performance. Companies were ultimately going to be judged less on what they promised, more on what they delivered. That reckoning has now begun.
Owing to its sheer novelty — ChatGPT was launched a little more than a year ago — AI had until now got an easy ride. Many of its externalities, such as its ravenous need for energy and water or its free use of data, which was potentially infringing on copyrights, had not yet been priced into its production costs. With politicians, regulators and other interested parties now starting to make demands of AI companies, investors are looking more closely at their business models.
Equally, after eagerly experimenting with ChatGPT, we all began encountering some of the technology’s bugs. Despite the impressive advances made, for many of us our primary exposure to AI still remains chatbots which leave us frustrated by bad customer service. Although the jury is still out on whether artificial general intelligence will ever come into existence — so far AI has replicated and even improved upon some specific human tasks, but it’s still unclear if it can replicate human intelligence itself — sceptics suggest the requisite range of products and services will fall short of what the enthusiasts imagine.
Moreover, what is all too easily forgotten is that the US stock market boom of the last decade was fuelled by cheap money. Since the 2008 financial crisis, the market has risen six times over. In part, that’s because in that period the US money supply grew faster than the economy, the result being a pool of excess savings that had to be parked somewhere. Add to that the fiscal largesse of governments of all stripes — Trump cut taxes, Biden boosted spending — and it was inevitable a boom would result.
But after inflation broke loose two years ago, the Federal Reserve started reducing monetary supply. The Fed always maintained that the tightening would be temporary, that once the inflation rate returned to its target it would again cut interest rates. Yet with inflation proving more tenacious than the Fed anticipated, the narrative in markets is gradually shifting. There is a dawning recognition that the era of cheap money may be over for good.
Investors are thus starting to sober up a little. Not a few of them will wake up from the party with hangovers.
John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a religion (Simon & Schuster, 2017).
jarapley
Join the discussion
Join like minded readers that support our journalism by becoming a paid subscriber
To join the discussion in the comments, become a paid subscriber.
Join like minded readers that support our journalism, read unlimited articles and enjoy other subscriber-only benefits.
SubscribeNone of this is any surprise.
In reality, there have been two US stock markets for some time. The tech stuff (including the “Magnificent Seven”) exist in a world of their own and have continued “going up and to the right” as the Americans like to say.
Meanwhile, the rest of the US stock market (all the boring old legacy companies who do tangible stuff) has been in a steadily declining market for some time. It’s just gone largely unremarked due to the AI and tech euphoria where – yet again – everything is “priced for perfection” (or rather “perfection plus” this time around).
I don’t see why a tech bubble burst should have a huge impact on the rest of the market. Any more than it did during the bubble inflation phase.
And let’s hope that the mad two decades of goverenment sponsored cheap money are now behind us and never to be repeated. Along with the “Greenspan put”. And that people wake up to the harm that Clinton did in initiating these policies (and pretty much every politician since in going along with them).
Yep. The tech company I work has had shares going through the roof these past few years. They’ve wobbled a bit the past few weeks, but that really only reflects the NASDAQ, reflecting unease regarding war.
The post financial crisis stock market could be summed up as “this bubble will burst any second now…” Followed by more QE and money printing finding its way to the asset markets.
AI is a lot more than ChatGPT. Makes a big difference in engineering (coding and testing), Medicine (accuracy in finding problems in various scans etc). Music, entertainment, writing. Long list. Nvidia has a huge lead and this is a new leap forward. It might correct itself occasionally but the long term trajectory is up.
I’m not disagreeing that AI is significant and will make a big difference to many things. But this shows all the classic signs of a bubble.
There’s also only a finite amount of money that companies and individuals can spend on ultra-expensive nVidia chips (without cutting spending on essentials in other areas). Remember also that It kit depreciates incredibly fast (as newer/better/cheaper stuff is developed) when you learn that companies are borrowing money against their nVidia AI data centre assets. Because those lending the money don’t care that they’ve secured the loans against those depreciating assets. Yet.
It’s the dot com bubble all over again.
In some ways we never got over the dot com crash. That happened with the Greenspan put in the background and then 9/11 happened, interest rates were slashed and the cheap(er) money found its way into property and ninja loans etc. Which led to the subprime crisis and crash of 07/08. Which in turn gave us QE and mounting debts and, eventually, along with other stresses like the war with Russia, inflation and finally back to sensible levels of interest rates.
I’d like to think they’ll keep out of it this time but who knows what will come out of the woodwork and need ‘fixing’. I expect within a year we’ll be told deflation is a danger and interest rate cuts and QE will be back.
The future is becoming even more unpredictable. Perhaps an even greater AI novelty than ChatGPT is around the corner which can send these stocks soaring again. Is the AI stock party really over, or is another one about to start?
The stock markets are built on a foundation of quick sand, held up by massive government deficits and debt around the world. The US is heading towards a 50 trillion debt by around 2030, most of Europe is the same or worse, so is Japan and China. The magnificent seven will turn into the nightmare seven as the Overvaluation collapses. Like crypto, AI is a hyped up ponzi scheme, full of wild speculation. Nasdaq going under 10,000 soon, which will drag down the other markets on fear
Interesting statistic from Sequoia Capital: expenditure on AI to date $50bn. Revenue generated thus far $3bn. Sequoia giving the sector 12- 18 months max to prove the commercial viability or they are out.
Those numbers don’t surprise me.
I’m not sure they can just be “out” like that. They’re a leading VC company and will be heavily invested. The floor’s a long way down for some of these stocks if and when the confidence goes – and the drop will be fast and hard to finesse.
Interesting Sequoia Capital statistic: expenditure to date on AI $50bn. Revenues generated $3bn. Sequoia.giving the sector 12.months (max 18) to prove commercial viability or they’re out.
Not seen those numbers Susan but from the noise I think those are far too small. AI will be big, really big at some point not that far away.
I’m an old geezer so I tend to be skeptical of new stuff. So far, everything I’ve seen on AI is conventional wisdom.
Years ago, George Gilder wrote that the economic growth runs on “surprise” not on conventional wisdom.
Funny. This guy is an author and academic yet is postulating on financial markets. Hence the nonsense. The AI thing is no different to railways, automobiles, airplanes, etc when they came to be. A couple have legs, dozens don’t. All market participants know this which is why Nvidia is so bought up. Because they perform and they make a ton of money. Their earnings jump last time was immense. Nothing has changed. Bumps will happen, Nvidia will be the Microsoft equivalent in AI going forward. Maybe. Certainly the world is not yet coming to an end.