Why Soaring AI Stocks May Falter | Chief Investment Officer

Artificial intelligence may not be the economic booster rocket that optimists fancy it to be, according to an analysis by BCA Research. The “bubble in anything AI-related is the greater risk, irrespective of whether it catalyzes, or coincides with, a U.S. or global recession,” wrote Dhaval Joshi, the firm’s chief strategist.

While AI stocks have had an enormous runup, skeptics are starting to wonder how long the streak can last. Reason: The payoff seems distant. In another commentary, BCA wrote that “the euphoria on how quickly the AI gold rush will yield its gold, and to whom, risks being popped.”

AI has been very beneficial to investors in recent years, adding an estimated $16 trillion in value to the S&P 500 since late 2022, per BCA (the index’s current value if $45.8 trillion). The largest exchange-traded fund tracking AI, the Global X Artificial Intelligence & Tech ETF, has advanced 17% annually over the past five years, beating the S&P 500 (15%), and is up 13% this year, although it now is trailing the S&P 500 (18%) in 2024.

Nvidia, which specializes in producing chips for AI, has soared 92% yearly over the five-year period, and still is roaring, with a 140% rise this year.

The economic bounty that AI could create has been the subject of widespread optimism. JPMorganChase CEO Jamie Dimon contended in his annual investor letter that AI will be as economically transformative as electricity or the steam engine. Michael Arone, chief investment strategist at State Street Global Advisors, made a similar argument in a commentary, writing that AI’s “impact on productivity could add trillions of dollars in value to the global economy.”

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One complication for AI stocks is that, for a long time, many investors borrowed cheaply in Japan to buy them, but lately, the appeal of the “yen carry trade” has dipped, softening demand, as the Japanese central bank has started to hike interest rates.

By BCA’s reckoning, the popularity of AI stocks is independent from whatever happens to the global economy. A collapse of AI equities, its analysis declared, is “the bigger risk over the next 12 years.”