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High expectations, deep disappointments

Published on 01-23-2025

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2025 Super Trend No. 3: the AI mania

 

We get it. AI will be a wildly disruptive technology that will kick over the chess board on which the current economy is being played. Anyone who has spent a few minutes using ChatGPT has seen that generative AI can do very impressive things. Large companies are pouring colossal sums into the trend. Sam Altman, the boss of OpenAI, talked openly this year of raising $7 trillion from Middle Eastern petrostates to create superintelligent machines. Other tech executives have not been shy to draw comparisons to transformative moments in history, such as electrification during the Industrial Revolution.

These are all nice and grand statements. And, at the moment, the world seems to be taking them at face value. But let’s be real: The only players profiting from AI are a select few hardware builders like Nvidia.

AI is now deep into a familiar path: a speculative cycle fueled by big promises. Admittedly, this is tricky territory. Every asset price is just today’s number multiplied by a narrative about tomorrow. With AI, companies don’t need to deliver on anything tangible for a while, leaving investors to fantasize, extrapolate, and build stories without the nagging constraint of reality. No one knows how long it can last.

But we do know some things. Today, the market is saying that this time will be different, that the structural demand created by AI will override the cyclical nature of the industry, overcome any geopolitical headwinds, and that the winners in the long term will be the same as the winners now.

These are all very big assumptions. The tech industry is notoriously cyclical, marked by regular demand shifts. Nvidia’s valuation could come down simply because investors wake up one day to discover that supply and demand have become more balanced. The price could also come down from competition. By definition, the tech sector is a hotbed of innovation. Company leadership, especially in a period of rapid innovation, doesn’t last long. In a decade’s time, today’s AI chip designs will be deeply obsolete. How likely is it that other tech companies, who may face a coming AI chip bottleneck (in a sector that currently earns an enviable 70%+ gross margins), won’t find a way to create and innovate on their own (and stop sending billion-dollar checks to Nvidia)? Competition is the bedrock of capitalism.

Where to next? High expectations make disappointments more likely. Demand for AI chips could fall short of forecasts, making it harder for the tech sub-sector of chip makers to justify their massive investments. Alternatively, non-tech companies might see a boost as AI improves their productivity, leading to a rise in their valuations.

Ironically, AI’s broader economic impact may accrue less to its pioneers and more to its adopters. Historically, markets tend to overestimate returns for innovators and underestimate returns for the users. Industries integrating AI – healthcare logistics, manufacturing – could see significant productivity gains.

However, identifying these gains is challenging and slow-moving, leading to a disconnect between AI’s market hype and its real-world economic benefits. For example, AI-driven automation in customer service has already shown large efficiency boosts while logistics firms using predictive analytics are slashing operational costs. But such incremental improvements take time to scale and are harder to pin down than the headline-grabbing advances of AI innovators.

Investment implications

The AI boom bears all the hallmarks of a mania: astronomical valuations; narrative-driven momentum; and a tenuous grounding in economic fundamentals. Predicting the bubble’s trigger – whether it’s corporate cutbacks on AI investment due to poor ROI or investors waking up to these risks – is impossible. But the aftermath is clear: permanent capital losses, with recovery timelines stretching years or even decades (recall the wreckage of 1999). Cisco, a titan of the 1999 tech boom, still trades below its peak, underscoring how speculative bubbles can inflict lasting damage.

Tyler Mordy, CFA, is CEO and CIO of Forstrong Global Asset Management Inc., engaged in top-down strategy, investment policy, and securities selection. This article first appeared in Forstrong’s 2025 Super Trends Report: Fifty Shades Of Greatness. Used with permission. You can reach Tyler by phone at Forstrong Global, toll-free 1-888-419-6715, or by email at tmordy@forstrong.com. Follow Tyler on X at @TylerMordy and @ForstrongGlobal.

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Content © 2025 by Forstrong Global. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited. Used with permission.

The foregoing is for general information purposes only and is the opinion of the writer. The author and clients of Forstrong Global Asset Management may have positions in securities mentioned. Performance statistics are calculated from documented actual investment strategies as set by Forstrong’s Investment Committee and applied to its portfolios mandates, and are intended to provide an approximation of composite results for separately managed accounts. Actual performance of individual separate accounts may vary with average gross “composite” performance statistics presented here due to client-specific portfolio differences with respect to size, inflow/outflow history, and inception dates, as well as intra-day market volatilities versus daily closing prices. Performance numbers are net of total ETF expense ratios and custody fees, but before withholding taxes, transaction costs and other investment management and advisor fees. Commissions and management fees may be associated with exchange-traded funds. Please read the prospectus before investing. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

Image: iStock.com/Dmytro Skrypnykov

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