AI boom offers productivity boost, defying dotcom bubble fears

Despite the hype surrounding artificial intelligence (AI) since Microsoft’s investment in ChatGPT back in January this year, the buzz in the markets is far from the excesses of the dot-com bubble. The recent rise in Nvidia’s market capitalisation, reaching US$1 trillion, has raised some eyebrows. However, the AI boom has a more solid foundation.

The decline in Big Tech stocks last year was primarily due to central banks raising interest rates, which affected the present value of future cash flows in the tech sector. This year’s rebound is driven by the real potential of AI to transform the economy. Companies like Nvidia have already reaped significant profits from the AI revolution, reports Channel News Asia.

A recent report from the McKinsey Global Institute highlights that since the turn of the millennium, net worth, asset values, and debt have grown faster than GDP. In contrast, productivity growth among G7 countries has slowed. AI could help break this cycle by improving productivity.

Dario Perkins of TS Lombard suggests that AI can achieve this through two mechanisms. Firstly, AI can make current processes more efficient, helping workers make better decisions and optimise their tasks. Secondly, AI can help workers invent new things, make new discoveries, and generate technological progress that can raise future productivity.

Generative AI, which is capable of self-learning and performing multiple tasks, has been shown to boost the efficiency of workers and companies that use it. The public-facing version of ChatGPT reached 100 million users in just two months. Data analytics firm GlobalData estimates that the global AI market will be worth US$383.3 billion in 2030, a 21% compound annual growth rate over 2022.

While some fear that AI could cause unemployment to soar, Perkins argues that the ultimate impact of technology on labour markets is theoretically ambiguous. Technological advancements have both substitution and income effects. Historically, the compensation effect has consistently outweighed the displacement effect.

It remains uncertain whether AI will break this historical trend or achieve human levels of comprehension. Its current stage of development can be unreliable and sometimes produce nonsensical results. The balance between AI’s deflationary impact and the current inflationary forces of supply shortages and tight labour markets is also unclear.

However, Nvidia CEO Jensen Huang believes we are at “the tipping point of a new computing era.” Big Tech is likely to continue marching to a different beat than more conventional companies in the S&P 500 index, which are more sensitive to monetary policy. Investors should remember that amidst the AI boom, some companies of real substance will rise alongside those that may not hold up in the long run.