It can be argued that the vast majority of the market rally that has ensued since 2022 lows can be attributed to the massive investment companies are making in AI. Companies have been investing heavily in everything from cloud computing capacity, to the energy infrastructure required to power these systems, to training large language models, to, of course, the hardware required to make it all work.
The purpose of this communication is not to take a position for or against AI and what it could mean for investors and society at large. That is a complex and fascinating topic that can be discussed for hours. What I am hoping to do is provide some insight solely within the context of what is happening in the AI space specifically. A few instances of late have led me to feel as though we may be reaching feverish levels in some areas of the market, especially the sectors and industries that are at the forefront of the AI boom:
1) Meta CEO Mark Zuckerberg commented that misspending a few hundred billion dollars (yes, hundred billion) represented less of a risk than building out their AI capabilities too slowly. I don’t necessarily think this is reckless (Meta isn’t the fifth largest company on the planet because it is run by a cautious CEO), but it does suggest that there is a perception that being late or slow will have serious consequences. The stakes are already high, and this raises them.
2) OpenAI recently announced a massive investment in Oracle’s cloud computing services. Nvidia subsequently committed to a $100B investment in OpenAI. Meanwhile Oracle spends billions on Nvidia’s GPUs. A gives to B, who gives to C, who gives to A and the markets continue to rally on what could be argued is a “circular” or related party transaction. If the true potential of AI is to materialize in the real world economy it will require the participation of more than just a handful of companies paying each other for each other’s services.
3) Oracle recently made the decision to invest heavily and join major players like Google and Microsoft in the AI buildout race. Up until now the vast majority of the investment in the AI space by the largest companies on the planet has been funded through earnings. What stands out about this announcement is that Oracle plans to fund the investment through a debt offering. This marks a shift towards a riskier form of funding that could saddle the company with long term debt if their bet doesn’t pay off.
I’ll be the first to admit that I am not qualified to make a call on whether this is perfectly normal or signals that we are in the midst of a bubble developing. It does however demonstrate a pattern of new behaviors that should not be ignored. Does this mean that I am pessimistic, or bearish to put it in investing terms? Absolutely not. The history of markets is the story of human progress and as long as the vast majority of humans wake up every day with the goal of improving their lot in life, there is no reason to not believe that investors will be better off. There will be recessions, pandemics, wars and any other manner of challenges along the way I assure you, but there would have to be a fundamental change in our capacity and desire to innovate, improve and progress for me to change my position.
What can or should we do about it? The playbook is the same as it would be in the wake of any prolonged period of strong performance or perceived risk: realign asset allocation to reflect your risk tolerance and time horizon, ensure that you are sufficiently diversified and take profits from outperforming holdings.
BY ROBERTO LAMORTE – Associé / Associate
■ Financial Security Advisor with 9447-0347 Quebec Inc.
■ Mutual Fund Representative with Investia Financial Services inc.
The comments contained herein are a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. This newsletter was written, designed, and produced by Lindsay Lynch, Financial Planner with Investia Miramichi, a registered trade name with Investia Financial Services Inc., and does not necessarily reflect the opinion of Investia Financial Services Inc. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any securities.
Mutual Funds are offered through Investia Financial Services Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the Fund Fact sheet or prospectus before investing. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated.
