The financial media has been abuzz with talk of a potential bubble in the publicly traded shares of companies involved in the development and use of artificial intelligence. While some stocks have seen impressive rallies, such as Nvidia, Microsoft, Google parent Alphabet, Oracle, and Adobe, there is no evidence of a bubble in shares related to Generative AI.
To understand what defines a bubble, we can turn to market historians and economists like Charles MacKay, John Kenneth Galbraith, Edward Chancellor, and Charles Kindleberger. From the Dutch tulip mania of the 17th century to the Roaring ’20s stock craze, and the internet bubble of the 1990s, there are common characteristics that define these phenomena. They include early disbelief in a particular asset’s transformational potential, rapid price increases, public participation in the mania, and massive stock issuance by companies associated with the trend.
However, in the case of AI, it is still early days, and while there has been considerable interest and investment, only a handful of companies are bidding up generative AI stocks. Unlike previous bubbles, the public is not yet “all in,” and the easy money from the Federal Reserve is not fueling speculation in publicly traded AI shares.
It’s been said that bubbles are difficult to spot while they’re inflating, but having covered several, I would argue that they are easy to identify. There is also a significant difference between a small and significant bubble, with the latter causing market crashes and potentially entire economic collapse.
For now, AI is receiving significant attention and investment dollars, but investors are still looking at factors such as revenue and profitability. However, when speculation on AI becomes entirely focused on potential and independent of actual financial performance, the smart money will surely be separated from the rest.
Author Ron Insana, a seasoned CNBC and MSNBC contributor, and Wall Street author and commentator, highlights how it’s the early days for AI yet, and while significant interest and investment have surged in recent times, they fall short in numbers compared to previous financial bubble trends witnessed. Ron Insana concludes with adding how when that day comes, where the smart money is separated from the rest of the pack, the investors betting on intelligence will seem much less intelligent.
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