Investors in AI-driven bubble risk forgetting painful lessons
AI-driven stock market hype is not independent of what is happening in the rest of the economy
We all suffer from nostalgia bias, thinking back to a golden past, remembering the good and forgetting the bad. In looking to the future, we worry about the risks and are fearful of the unknown. This tendency makes us forget how the last financial crisis wiped out quite a few investors and created new wealth.
McKinsey Global Institute marked the consultancy’s centennial year by publishing a book called A Century of Plenty, meant to show that mankind never had it so good. It puts forward a bold scenario: by 2100, global gross domestic product could be 8.5 times larger than at present. The advances of technology can overcome resource limits, and human ingenuity could bring bigger and better progress and well-being.
However, the road to nirvana is paved with many pitfalls. Accepting that we should be optimistic and work towards the goal of greater progress, we must also survive the short-term bumps in the road and diversions.
First, the AI business is today highly concentrated in selected players, making the S&P 500 one big trade in the “Magnificent Seven” rather than a diversified benchmark. These seven technology stocks have driven 85 per cent of the S&P 500’s gains in May after contributing 50 per cent in April. The top 10 largest companies now account for around 40 per cent of the S&P 500’s total market capitalisation.