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July 26, 2024 - 10:00am
Narratives, the Nobel Laureate Robert Schiller reminds us, drive both markets and economies. Lately, the story that has driven the American stock market to new heights, led by the Magnificent Seven tech companies at the vanguard of it all, has been the AI revolution. But recently the Magnificent Seven have started to falter, and on Wednesday they drove market indices to their sharpest declines in two years.
Until now, the decline was driven by a rotation out of tech stocks and into the broader market — or, in market jargon, from growth to value stocks. Driving the shift were recent reports suggesting the economy might be on its way to a “soft landing” of lower inflation but continued growth, which would allow the Federal Reserve to cut interest rates. Such a scenario would mean the innovation boom might slow, but that reliable companies selling the quotidian things we all want would start to prosper. So while the Big Tech stocks took a bruising, the broader market of smaller companies did better.
However, a new narrative is also doing the rounds. Some wonder if the good days are behind us, worried that the economy may contract rapidly and sink into recession, or that inflation might turn back up and postpone rate cuts. As a result, some investors have begun to cash out and seek shelter.
Behind this caution is a growing worry that the AI story may turn out to be a fairy tale. Nvidia’s stellar performance this year is as real as it can be, built on soaring earnings and massive sales. However, Nvidia isn’t making AI. It’s making the chips and software that other companies need to create AI.
Similarly, the explosion of data-centre construction, while equally real and lucrative, isn’t giving us any AI products. It’s just adding the capacity that will be needed for AI systems to operate. While this infrastructure is tangible, thereby justifying the valuations of the companies involved, the expansion in capacity will only make sense if further innovations in AI render it useable. And given how expensive all this is, further innovations in AI will need to be as truly transformative as its exponents claim they will be, if all this is to make any sense.
And that’s a big if. AI has given us some nifty new tools, such as ChatGPT. But so far, their impact on the overall productivity of the economy has been pretty underwhelming. We’re still waiting for the “killer app” that is going to play the 21st-century role that the spinning jenny did in its day.
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SubscribeAI sure makes software engineering and a lot of technical work much easier to complete. Ask software engineers. That seems like gold to me. Medical scans read with an accuracy far surpassing humans in a fraction of the time. More gold. Transcription, translation vastly improved. Gold. Image recognition with an accuracy far surpassing what preceded it. The list is endless. Innumerable relatively menial tasks from preparation of legal documents to CVs to medical reports/summaries done with greater ease and far more accuracy. Again surely gold.
I think first generation of software/computers are the shovel you speak of. AI is a next generation digger that will find a lot more gold a lot more quickly.
I agree. Incremental gains are everywhere as existing infrastructure is upgraded with the new possibilities of AI. Such things (across vast and complex networks) take time to bed in and become familiar to us humans so we can utilise them in a human-friendly way.
Expecting a new technical paradigm to emerge with every generation is not only unrealistic but possibly counterproductive and impossible to implement successfully before the next one. The NHS, for instance, is still trying to get to grips with “joined up” computerised patient records. Therefore, if markets are truly based upon the expectation of a new “spinning jenny” they’re likely to become toxic to the societies which they’re supposed to serve – a true crisis of capitalism.