This year has marked a new surge of investment enthusiasm for Artificial Intelligence (AI). Experts forecast that the return could be immense, however this trend could be punctured with a ‘dot.com-like’-burst if the Federal Reserve was to make a policy mistake. Bank of America (BofA) refers to this AI investment bubble as a ‘baby bubble’. The eagerness of investors to back this technology has been sparked by the success of ChatGPT, a open language chatbot developed by OpenAI. Also, high profile investments such as Bill Ackman’s venture to invest a billion dollar into Google’s parent company, Alphabet, have gained the public’s attention.
The surge of investment for AI is reminiscent of the dot.com era in the late 90’s, a time of rapid growth leveraging the possibilities of the internet and fuelled by easy access to money. What stopped the dot.com bubble was the moment when the Federal Reserve increased its benchmark interest rate. If this was to occur again in regards to AI the dot.com-like burst could be reignited.
This trend is evident in US bond yields which rose above 4%, signifying that the Fed might be consider pausing the round of rate hikes for the June 14th gathering. Despite inflationary pressure increasing, the Consumer Price Index (CPI) has been decreasing, meaning that, according to the Federal Reserve Chief, Jerome Powell, that the rate of increase may not be as necessary to meet key objectives.
Nvidia and Met Platforms – microchip manufacturer and AI advertising supporter respectively- have both seen their share prices double this year, a sign of future potential. However, the dot.com burst of 2000 should be noted, reaching a peak of 5,000 on the Nasdaq Composite Index before plunging by 78%. It took 15 years for the index to regain its lost value.
Fundstrat declared that as of right now investors are looking at AI in optimistic tone, however it is argued that certain tech companies looks overbought perhaps indicating a burst on the horizon.
About Bank of America
Bank of America (BoA) is an American multi-national banking and financial services company. It is the second largest bank in the United States and also ranks as the second largest bank in the world by assets. BoA provides a wide range of services including credit cards, wealth management, investment banking and corporate banking. The company is headquartered in Charlotte, North Carolina and employs more than 208,000 people worldwide.
About Michael Hartnett
Michael Hartnett is the Chief Investment Strategist at Bank of America Global Research. He is responsible for developing and executing global investment strategies for clients. Hartnett has been with Bank of America since 2010 and has more than 16 years’ experience in the banking and finance industry. He is a frequent contributor to industry publications and participates in conferences discussing the current global economic landscape.
