Pomona College business professor Gary Smith thinks Big Tech’s AI bubble might be ready to burst. He recalls a previous burst around 2000:

Confirmation bias was rampant during the late 1990s dot-com bubble when internet enthusiasts proclaimed the arrival of a new economy that made traditional stock valuation metrics obsolete. Forget profits and dividends — we were told to value internet stocks based on how many people visited their websites, the number who stayed for at least three minutes, and the number of files that websites downloaded from servers. Some said we should look at a company’s burn rate, how fast it spent the money it had raised. (The faster, the better.)

Gary Smith, “Big Tech’s AI bubble is alive and unwell,” MarketWatch, August 1, 2024

Not so fast, he says: “The actual annualized return over the next 10 years was negative 0.5%.” A recent article makes him wonder if it the bubble and burst is playing out again today:

The author’s new valuation model is an equation stating that a stock’s future price is equal to its current price multiplied by the ratio of the current price/earnings ratio to the future price/earnings ratio:

This equation doesn’t make sense mathematically or logically. The author even gives an example using Nvidia stock that inadvertently demonstrates that it is nonsense.

Smith, ““Alive and unwell”

He’s not the only one to wonder about this stuff…

A number of other sources have, spookily, hinted recently at upcoming negative news about the AI “Sure Thing” recently, including:

From Fortune, we learn, This week’s tech selloff shows Wall Street is getting nervous about businesses betting the bank on AI”:

During the first half of this year, Wall Street sent tech shares—and those of many other businesses, for that matter—soaring on the hope that the hundreds of billions of dollars they’ve spent so far on AI would pay off quickly. Companies that played the AI game right would soon enjoy a windfall of cost savings and extra profits, or so the theory went.

But then a funny thing happened this week: The Nasdaq nosedived as much as 5% after Wall Street started worrying that the expected AI utopia may not materialize as quickly as initially believed (tech shares recovered somewhat in mid-day trading on Friday). You see, most companies betting the bank on AI have little financial benefit to show from it so far.

Verne Kopytoff, July 26, 2024

From The Independent: “Could the AI bubble be about to burst? — Shares in AI stocks in the US and Asia slid dramatically overnight, showing that Wall Street’s investors have started to run out of patience with the hype, writes James Moore – but is this a crash, or a necessary course correction?” (July 25, 2024)

Well, why couldn’t it be both? Nothing like a disaster to correct a course.

From The Business Times in Singapore: “Goldman’s top stock analyst is waiting for AI bubble to burst If significant uses of the technology do not start to become apparent in the next 1.5 years, the stock-market tide will turn, says Jim Covello” (July 19, 2024)

From Investing.com, “‘Another Nasdaq crash?’: SocGen warns of potential US tech sector bubble burst. “With the US Tech sector now accounting for some 35% of the S&P 500 market cap, investors need to be on high alert for a potential bursting of the bubble,” Societe Generale global equity strategists wrote in a note. The commentary from SocGen’s team of analysts reflects concerns that the equity market may be on the verge of a downturn, reminiscent of the first full-blown bear market since the 2008 Global Financial Crisis.” (July 20, 2024)

Is it all just summer doldrums? Or a justifiable sense of unease?

Two things we can be sure of: Things that can’t go on forever won’t. And even AI can’t make hype into reality.

You may also wish to read: Imprudent Prudence: Is failure okay when everyone is failing? Market turbulence can cause endowment fund managers to travel with the herd — sacrifice returns in order to reduce annual volatility. The current, widely-favored 60/40 strategy has little or nothing to recommend it beyond the fact that it is what everyone else is doing. (Gary Smith)