Opinion | With AI looking increasingly like a liability, a storm is coming
News Summary
The article warns that projected spending in the tech sector indicates future trouble, questioning investors' readiness to await returns. It notes a recent US$1.2 trillion AI-driven tech stock sell-off, yet criticizes simplistic views that tech stocks are the only cloud over an otherwise sunny Wall Street. The author posits that viewing AI and tech stocks as infallible is naive, asserting that a market storm is imminent.
Background
Over the past few years, AI-driven tech stocks have dominated global equity markets, attracting substantial investment and witnessing soaring valuations. Some companies achieved extremely high valuations even without profitability. This mirrors the IT bubble of approximately 25 years ago, when information technology stocks traded far above earnings projections, ultimately leading to a burst that dragged down most other stocks. Currently, market concerns are escalating regarding the sustainability of AI valuations. Recent significant sell-offs in tech stocks reflect this apprehension, suggesting investors may be re-evaluating the risk-reward profile within the sector.
In-Depth AI Insights
What are the underlying structural vulnerabilities in the current AI valuation that make it susceptible to a "storm"? - Valuation-fundamentals disconnect: Many AI companies' valuations are built on aggressive future revenue and profit projections rather than current robust performance, making them vulnerable to significant corrections if growth slows or earnings disappoint. - Speculative capital influx: A large volume of speculative capital chasing the AI narrative has led to overconcentration in a few frontrunners (like Nvidia) and conceptual stocks, rather than balanced development across the entire ecosystem. - Unclear profitability models: Beyond a few hardware or platform providers, many AI application and service companies have immature profitability models, making it difficult to justify their high R&D investments and market valuations. - Intensifying competition and technological obsolescence risk: The AI sector is highly competitive with rapid technological iteration, meaning existing advantages can quickly erode, posing challenges to sustained profitability. How might a significant AI/tech market correction impact the broader economic and political landscape, especially under the Trump administration in 2025? - Negative wealth effect: A deep tech stock correction would trigger a significant negative wealth effect, impacting consumer confidence and spending, potentially pressuring U.S. economic growth. - Increased financial market volatility: Eroding confidence in high-growth tech stocks could lead to broader equity market volatility, potentially spilling over into other asset classes and posing challenges to financial stability. - Pressure on Trump administration: Should economic slowdown or market turbulence intensify, the Trump administration would face pressure to implement economic stimulus measures or pursue more protectionist policies to stabilize the domestic economy and employment, potentially exacerbating trade tensions. - Impaired innovation ecosystem: Venture Capital (VC) and Private Equity (PE) investment in the AI sector might slow, affecting startup funding and the pace of innovation, potentially weakening U.S. technological leadership in the long term. From a long-term strategic perspective, how would a major tech/AI sector re-rating reshape global capital flows and regional market dominance? - Shift from growth to value: Global capital might rotate from overconcentrated high-growth tech stocks towards stable cash flow, traditional industries, or defensive assets, seeking more robust investment returns. - Regional market rebalancing: If the U.S. tech market undergoes a deep correction, some capital may seek safe-haven opportunities in emerging markets or non-U.S. developed markets, potentially offering a temporary boost to markets like Japan, which have already benefited from capital outflow, or accelerating diversification into European and Asian (ex-Greater China & Japan) markets. - China's tech self-reliance strengthened: China might leverage this opportunity to further advance its indigenous R&D and domestic substitution in critical technologies like AI and semiconductors, reducing reliance on Western technology and attracting more domestic capital support. - Evolving regulatory environment: Governments worldwide may intensify scrutiny and regulation of AI technology and large tech companies to address market failures, monopolistic risks, and societal impacts, profoundly affecting tech companies' business models and profitability.