Investor mania for artificial intelligence has played a major role in the stock market’s 39% surge over the past 12 months, as measured by the S&P 500 index.
Nvidia (NVDA) has been the big kahuna. The dominant provider of semiconductors for AI applications has seen its stock price more than triple during that period.
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Some experts, such as Harvard economist Larry Summers, consider AI equal in importance to the Industrial Revolution.
“This offers the prospect of not replacing some forms of human labor, but almost all forms of human labor,” he said at Fortune's Innovation Forum earlier this year.
“AI will substitute for a doctor making a difficult diagnosis … before it substitutes for a nurse’s ability to hold a patient’s hand when the patient is frightened,” he said.
Goldman Sachs analyst skeptical of AI’s importance
But not everyone is convinced AI will be such a big deal. It’s certainly not a big factor yet, says Jim Covello, head of global equity research at Goldman Sachs.
“We're a couple years into this, and there's not a single thing that this is being used for that's cost effective at this point,” he said in a Goldman podcast.
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Trillions of dollars are set to be spent on developing AI infrastructure, such as data centers and applications, Covello noted.
So what trillion-dollar problem is AI going to solve, he asks. This technology transition differs from any he’s seen in the last 30 years.
“Historically, we've always had a very cheap solution replacing a very expensive solution,” Covello said. “Here, you have a very expensive solution that's meant to replace low-cost labor. That doesn't even make any sense from the jump.”
If you do want to invest in AI, “keep buying the infrastructure provider stocks,” he said in the June-July podcast.
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“Is it really expensive? Absolutely. But I've never seen a stock that goes down only because it's expensive. It got expensive for a reason. People believe in the fundamental growth outlook.”
Covello said if the stock drops, it will be due to a growth problem, not because of the valuation.
Jeremy Grantham says AI has sparked stock bubble
Investment legend Jeremy Grantham, co-founder of GMO money management firm ($66 billion of assets), takes an inverse view to Covello. Grantham thinks AI is a huge deal in the long term, but he thinks AI stocks are overdone in the short term.
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“AI is serious. It will change everything,” he told Morningstar, a top investment research firm. “It’s not surprising the market took it seriously. The bigger the new idea, the bigger the new invention, the more the market becomes overpriced, the more it attracts euphoria.”
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There’s a cycle for these seminal developments, Grantham said. “They overdo themselves in the short term, they crash in the intermediate term, and then they come out of the wreckage and change the world in the long term.”
For example, he cited canals, railroads, and the Internet.
Grantham is often bearish on stocks. He accurately predicted the dot-com stock crash of 2000 and the global financial crisis of 2007-09. He also called stock market bottoms in 1982 and 2009.
Of course, like anyone who tries to forecast markets, he has made some mistakes, too.
He expects foreign stocks to outperform U.S. stocks over the next 10 years after trailing their U.S. brethren for more than a decade. “Historically, they’ve tended to rotate,” he said.
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