LONDON — LONDON (AP) — Lingering doubts about the economic promise of artificial intelligence technology are beginning to attract the attention of financial institutions, which this week sounded the alarm about an AI investment bubble.
Bank of England officials on Wednesday signaled the growing risk of a crash in tech stock prices inflated by the AI boom.
“The risk of a sharp market correction has increased,” the British central bank said.
The head of the International Monetary Fund sounded a similar alarm hours after the Bank of England report.
Global stock prices soared, boosted by “optimism about the productivity-enhancing potential of AI,” said IMF Managing Director Kristalina Georgieva.
But financial conditions could “change abruptly,” she warned in a speech on the eve of the organization’s annual meeting next week in Washington.
“Bubbles are obviously never very easy to identify, but we can see that there are some potential symptoms of a bubble in the current situation,” said Adam Slater, senior economist at Oxford Economics.
These symptoms include rapid growth in technology stock prices, with technology stocks now accounting for around 40% of the S&P 500, stock valuations that appear “stretched” beyond their value and “a general sense of extreme optimism in terms of the underlying technology, despite the enormous uncertainties about what that technology might ultimately yield,” Slater said.
The most optimistic projections for the fruits of generative AI products predict a transformation of the economy, leading to annual productivity gains that Slater says have not been seen since Europe was rebuilt after World War II. On the low end, economist Daron Acemoglu of the Massachusetts Institute of Technology predicted a “non-negligible but modest” U.S. productivity gain of just 0.7 percent over a decade.
“You have an incredibly wide range of possibilities,” Slater said. “No one really knows where it’s going to land.”
Investors have closely watched a series of intertwined deals in recent months between major AI developers such as OpenAI, maker of ChatGPT, and companies building the expensive computer chips and data centers needed to power those AI products.
OpenAI isn’t making a profit, but the privately held San Francisco company is now the world’s most valuable startup, with a market valuation of $500 billion. It recently signed major deals with chipmaker Nvidia, the world’s most valuable publicly traded company, and rival AMD.
The Bank of England did not name specific companies, but said that by “a number of measures, stock market valuations appear stretched, particularly for technology companies focused on artificial intelligence.”
The report says stock valuations are “comparable to the peak” of the 2000 dot-com bubble, which then deflated and led to a recession. With technology stocks accounting for an increasingly large share of benchmark stock indices, stock markets are “particularly exposed if expectations regarding the impact of AI become less optimistic.”
The bank highlighted so-called downside risks, including shortages of electricity, data or chips that could slow progress in AI, or technological changes that could reduce the need for the kind of AI infrastructure now being built around the world.
The IMF’s Georgieva said current stock valuations “are heading toward the levels we saw during the Internet optimism 25 years ago. If a sharp correction were to occur, tighter financial conditions could dampen global growth,” she said.
Tech company bosses downplay pessimists.
The current AI boom is an industrial bubble rather than a financial or banking one and will be good for society even if it bursts, Amazon founder Jeff Bezos said.
“The industrial ones are not as bad. It might even be good because when the dust settles and you see who the winners are, society benefits from these inventions,” Bezos said at a recent technology conference in Italy.
He compared it to a previous biotech bubble in the 1990s that resulted in the creation of new drugs that could save lives.
The hype around AI is attracting a huge wave of money to fund new business ideas, but it is also clouding investors’ judgment, Bezos said.
“Every company gets funding, good ideas and bad ideas. And investors find it difficult, amid all this enthusiasm, to distinguish between good ideas and bad ideas, and that’s probably the case today too,” he said.
During a tour last month of a data center in Texas, OpenAI CEO Sam Altman predicted that people were “going to make stupid capital allocations” and that there would be short-term ups and downs in overinvestment and underinvestment.
But he added that “over the period we have to plan, we are confident that this technology will drive a new wave of unprecedented economic growth”, as well as scientific advances, improvements in quality of life and “new ways of expressing creativity”.
Nvidia CEO Jensen Huang acknowledged in an interview with CNBC on Wednesday that OpenAI doesn’t yet have the money to buy its chips, but “they’re going to have to raise that money” through revenue, which is “growing exponentially,” as well as equity or debt.
Huang said he also thinks a transition has occurred as major AI developers move away from chatbots that were operating “fundamentally at a loss” because the models “weren’t useful enough” to one in which AI systems are capable of higher-level reasoning.
“He does research before answering a question,” he said. “It goes on the web and studies other PDFs and websites, it can now use tools, generate information for you and it creates really useful answers.”
AI companies have spent more than a year touting the transformative potential of “AI agents” that can go beyond the capabilities of a chatbot by being able to access a person’s computer and perform coding and other work tasks on their behalf. But as the initial hype fades, Sudha Maheshwari, an analyst at Forrester, said companies looking to buy these AI tools are taking a closer look at whether they’re getting enough return on their investment.
“Every bubble inevitably bursts, and by 2026, AI will lose its luster, trading its tiara for a hard hat,” she wrote in a report Wednesday.
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O’Brien reported from Providence, Rhode Island and Abilene, Texas.
